Regular readers of In the Loupe will be aware of the wealth generating potential pink diamonds offer, and why they are best seen as a long-term investment, with a five to ten-year investment time horizon at a minimum.
We are often asked what kind of returns investors can expect in this space. This will obviously be influenced by multiple factors, including the size of the investment a person makes, the timeframe they hold for, and the type of pink diamond or diamonds they end up investing in.
The following chart plots the value of a pink diamond portfolio both now and in 2030, based on a range of initial investments, and using a forecast annual return of 11.94%.
This return is in line with the average historical USD pink diamond price for the three main categories of pink diamonds we source for clients at Australian Diamond Portfolio.
We’ve used three initial investment figures, starting at AUD $25,000 through to $100,000. $50,000 represents a standard investment level for Australian Diamond Portfolio clients.
Potential Investment Growth over 10 years for Pink Diamonds
As you can see, the return potential is significant, with investors standing to triple their money over a decade, should past performance be repeated, and should the diamonds the investor chooses match the overall price growth seen for pink diamonds as a whole.
Of course, it goes without saying that there is no guarantee that future returns will match those seen in the past, and pink diamond price growth may slow down going forward.
We believe that is unlikely though, for reasons we explain below.
Why diamond returns could be even better going forward
There are a number of reasons why we think diamonds may do even better in the years ahead, outperforming the gains seen between 2005 and 2009.
The first of those is lower interest rates, which make it harder to save or build wealth in cash. Back in 2005, interest rates in Australia were above 5%, and rising, whereas today, they are below 1%, and falling. This dynamic will make tangible assets like diamonds a more attractive investment.
The second is stock market vulnerability. From 2009 onward, stocks have been in a bull market, which is now the longest on record. That makes them more susceptible than ever to a fall, or at the very least a period of disappointing returns. This will also help demand for pink diamonds as investors seek alternative sources of returns.
Last but not least, there is the closure of the Argyle Diamond Mine, which is scheduled to cease production by the end of this year. The closure means that going forward, there will essentially be no new supply of pink diamonds into the market, making them even more rare in the eyes of investors.
Add all these factors together and it’s easy to see why the next decade might be even more rewarding for pink diamond investors.
Don’t forget the currency
One final factor that we think may boost the returns our clients earn from investing in pink diamonds is the currency, and the potential for a significant fall in the Australian dollar in the years ahead.
The reason we think the AUD may fall so much in years to come is the record low yields on Australian bonds, relative to US bonds. The table below highlights US and Australian 10-year government bond yields, the differential between the two, and the AUDUSD FX rate at three points in time.
- The end of 1999
- The end of 2011 (the year the AUD peaked vs the USD)
- The end of January 2020
As you can see, back in 1999, you earned 0.52% per annum more lending to Australia relative to America. At the time the AUDUSD FX rate was 0.6563
By end 2011 this gap had grown to 1.92%, a major factor pushing the AUDUSD FX rate above 1:1.
Today the yield differential is -0.57%, meaning you earn more now lending to America than Australia. Despite this, the AUDUSD FX rate is only back at 0.6691.
The chart below highlights how trends in these yield differentials and currency have played out over time, showing the AUDUSD FX Rate (pink line), and the differential in the yield paid on a US 10-year government bond and an Australian government bond (blue line).
Back in the early 2000s, the AUDUSD FX rate was nearer to 0.50. Given the yield differential is even more unfavourable today for Australia than it was then, one can’t help but think we might see significantly more downside for the currency in the years ahead.
If history were to repeat, the Australian dollar could comfortably decline a further 25% over the next decade. This would meaningfully boost the returns generated by pink diamond investors.
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.