17 Feb

Follow the legends

It’s been another week of frustration in Australia, especially for our friends, family, clients and colleagues in Melbourne, as another COVID-19 induced lockdown impacts Victoria.

Our sympathies go out to the people impacted by this, both directly and indirectly, with a special thought for all the small business people whose expected Valentine’s Day trade was disrupted by this turn of events.

Its impact on the economy is already being felt, with consumer confidence figures falling this week, with the Australian economy likely to struggle for the majority of 2021.

In this week’s market update, we share the latest news on pink diamond pricing, and some thoughts on the economy, financial markets and investing from one of the world’s best known and most successful investors.

As you will see, if events play out as he thinks they will in the years to come, then pink diamonds are set to dazzle.

Pink diamond prices held their value in Q4 2020

Ever since the Argyle Diamond Mine closed, we have noted a marked increase in the price for pink diamonds, particularly the higher quality categories that we focus on sourcing for our clients at Australian Diamond Portfolio.

In this we are not alone, as all the discussions we have had in recent months with our contacts in the diamond trade also note that prices for Argyle pink diamonds in particular have picked up noticeably of late, with this bullish trend now spilling over into all higher-grade pink diamonds.

Data just released by the Fancy Colour Research Foundation (FCRF) for Q4 2020 provides further validation of this trend, with their index, which covers a much broader category of stones than the high-quality pink diamonds we focus on at ADP, coming in steady for the quarter.

Indeed, the FCRF themselves noted some categories did better than others, with increases seen in the value of fancy pink and fancy intense pink diamonds. They also noted that demand for fancy coloured diamonds was solid throughout 2020, which is itself notable given the logistical challenges posed by COVID-19.

Overall, the results from the FCRF were as expected, and if anything only serve to reinforce the need for specialisation in this unique asset class.

A pink diamond

An investment grade pink diamond from Australian Diamond Portfolio.

It’s also worth noting that Q4 2020 saw some of the fastest price gains on record in share markets the world over, including in Australia.

Price gains like that often temporarily hold back demand for hard assets, as investors happily ‘chase risk’. The risk chasing tends to continue right up until the next market correction encourages investors to revisit the merits of investing in hard assets, which can prosper irrespective of the gyrations in financial markets and the economy.

Given stock markets are now trading at their most expensive level ever, the next crash, when it inevitably comes, is likely to be one for the record books.

Astute investors who are getting ahead of this by positioning themselves in hard assets like pink diamonds are likely to be well served as these events play out.

Follow the investing legends

Stanley Druckenmiller is one of the greatest investors on the planet. Since 1981, he has been managing money for the Duquesne Family Office, and to date, is yet to ever lose money in a given calendar year.

It is some kind of record.

In the last few months, he has been doing various interviews and media, where he has shared his view on the outlook for the global economy both in light of the threat posed by COVID-19, and the unprecedented monetary and fiscal stimulus that has been deployed in response to the pandemic.

To get a sense of the size of the stimulus that has been deployed, consider this comment that he made earlier this month; “The Cares Act added trillions of dollars in fiscal stimulus. How big was it? In three months, we increased the deficit more than if you took the last five recessions combined. And those were big ones. That was ’73, ’75, the ’82 recession, the early ’90s, the dotcom bust, and then, of course, the great financial crisis.”

Someone buying coffee through a hatch during the COVID-19 pandemic.

According to Druckenmiller during Cobid-19 we have “increased the deficit more than if you took the last five recessions combined”.

Druckenmiller has stated that he would not be surprised to see much higher levels of inflation in the years to come, which could go as high as 5-10% per annum. He noted that: “We actually have the chairman of the Federal Reserve with a $3.5 trillion deficit out lobbying Congress to do more spending and then guaranteeing those of us on Wall Street that he’ll underwrite it.”

Druckenmiller has also warned of the risk in equity markets, noting a few months ago that “right now we are in a raging mania”, as well as going on to say that “I’ve been doing this as some kind of chief investment officer since 1978. And this is about the wildest cocktail I’ve ever seen.”

Given his view on the economy, and the many risks investors face, it’s also fascinating to read about the way Druckenmiller has positioned his own portfolio today, so that he can protect and grow capital, irrespective of the environment.

His answers are highly insightful and reinforce many of the reasons why we believe pink diamonds will outperform in the years ahead.

We say that because Druckenmiller is positioned in two key ways that are noteworthy for pink diamond investors. Firstly, he is short the US Dollar, meaning he will benefit if the USD falls, and second he is long commodities, meaning he benefits if commodity prices rise.

If those positions pay off for him (and remember this is a guy that pretty much doesn’t lose), and if his thoughts about the potential for higher inflation come to fruition, then it is likely we will be in a perfect environment for pink diamond appreciation.

After all, pink diamonds are priced in USD, and as such would benefit both from a falling USD, and a broader bull market in commodities. They would also benefit, as indeed all hard assets will, from an increase in inflation.

From our perspective, pink diamonds wouldn’t just rise in line with other commodity prices, but indeed would be likely to outperform, given;

  1. They are genuinely scarce.
  2. Supply has been further curtailed by the closure of the Argyle Diamond Mine.
  3. Their investment demand isn’t tied to the broader economic cycle like industrial commodities are.

Add all these factors up, and it’s easy to see why we remain optimistic about the direction of pink diamond prices.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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