18 Aug

Inflation beast is stirring

It seems like the COVID-19 situation and the associated lockdowns are going from bad to worse in Australia, with the ACT joining Victoria and NSW in ordering citizens to stay at home.

In NSW, the situation continues to deteriorate, with the Premier all but admitting that the virus can no longer be contained, and the significant economic disruption caused by lockdown set to continue for months.

On behalf of the team at ADP, I’d like to send our very best wishes to all of you reading this who are affected by this situation, and hope that things begin to normalise as we head toward Christmas this year.

In the meantime, while the economy is largely closed, the markets remain open. In this week’s update, we look at building inflationary pressures across the economy, the impact it will have on investment portfolios, and why higher inflation will support pink diamonds.

Inflation beast is stirring

In periods where inflation rises, very few asset classes, from cash to shares to property actually do well, with most going backwards in real terms. Hard assets tend to be one of the few investment refuges in such an environment, with the desire to protect against higher rates of inflation one of the key reasons investors are turning to pink diamonds.

The evidence suggests it’s a very smart choice, with inflation trends clearly on the rise all across the developed world, including in Australia, where the latest data suggests prices across the economy rose by almost 4% in the last twelve months.

In America, the situation is even worse, with inflation rates for July suggesting that prices as a whole increased by 5.4% in the last twelve months.

These are the highest rates of inflation seen in about 15 years and they pose a major problem for people with minimal savings, or who are out of work, and indeed even those in a job but who are unable to get a pay rise to offset cost of living increases.

While headline inflation rates may decline from readings above 5% per annum in the coming months, there seems little doubt that we are now entering a higher inflation phase for the global economy, which will support hard asset investments like pink diamonds.

Evidence of the higher inflation phase we are heading towards can be seen in the chart below, which not only highlights CPI (the headline rate we always hear about on the news), which, as we discussed above, is now comfortably above 5% on a rolling 12m basis, but also:

  • Core CPI, which excludes food and energy prices
  • Median CPI, which is the change in inflation for the items whose price change is in the middle of all price changes
  • 16% trimmed median CPI, which is the price change for all items, after stripping out the bottom and top 8% of all price movements.

Median Consumer Price Index

Median Consumer Price Index

Source: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland, Haver Analytics.

Those last two inflation statistics, while a little wonky sounding, are seen by many in the markets as more reflective of the underlying inflation pulse in the economy.

This is because they remove the outliers that can cause volatility in the headline numbers, with the chart above showing clearly that the median and 16% trimmed median CPI figure are far less volatile than the CPI and Core CPI figures.

At the end of July, those less volatile figures were showing a clear uptrend, with the 16% trimmed median CPI figure for example now coming in at 3% per annum.

That’s not necessarily a huge problem today, but with governments around the world addicted to stimulus spending, and central banks more than happy to print the money to fund that spending, we can expect these inflationary trends to worsen in the decade ahead.

Astute investors don’t wait for official statistics to confirm there is a problem that anyone with their eyes open can see unfolding right in front of them.

Instead, they act ahead of the crowd, turning these issues into an opportunity to build wealth, instead of seeing it dissipate.

That’s exactly the opportunity an investment in pink diamonds provides today.

Argyle Diamond Tender hits the road!

'Signature Tender' pink diamonds

A selection of Argyle ‘Signature Tender’ pink diamonds from previous years

As regular readers of our market updates know, this year marks the final year of the world-famous Argyle Pink Diamond Tender.

Last week, this collection of rare pink, red, blue and violet diamonds made its way to Antwerp in Belgium, where Rio Tinto will showcase them, ahead of the completion of the Tender process due later this year.

For those with a sense of history, there is a nice touch in the way Rio Tinto are approaching this final tender, with Patrick Coppens, the General Manager, Sales and Marketing for Rio Tinto’s diamond business noting that; “The first Argyle pink diamonds tender was held in Antwerp in 1984 and I am delighted to host the final epic collection in Antwerp. Over the past 38 years Argyle pink diamonds have pushed the boundaries of rarity and value appreciation to new extremes.”

Coppens went onto note that: “When you consider the number of diamonds presented at the annual Argyle pink diamonds tender since 1984 would barely fill two champagne flutes, you begin to grasp the rarity and the tremendous gravitas of this final collection. Many of the invitees have participated in the annual Argyle pink diamonds tender for more than three decades and across generations, so it is an emotional moment in the history of Rio Tinto’s Argyle pink diamonds business and the natural fancy coloured diamond industry.” 

While the Tender features some of the most expensive diamonds produced at Argyle, coverage of the Tender, and anything to do with the closure of the Argyle Diamond Mine, is positive for the industry as a whole, helping push prices for all Argyle sourced stones higher.

Indeed, this is exactly what we have seen in the last year or so, with prices for pink diamonds up a minimum of 20% across the spectrum, with the attention that this Tender will generate only helping push the entire asset class higher.

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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