14 Sep

Interest rates, inflation and pink diamonds

After a two-week hiatus, we are pleased to be back with our regular updates. Quite a bit has happened in this time, most notably the passing of the remarkable Queen Elizabeth II, England’s longest ever serving monarch who sat on the throne for an incredible 70 years.

I think most can agree that her passing marks the end of era, with myself as the writer, and no doubt many readers of this publication having never known another head of state.

Back to pink diamonds, and in this week’s update, we’ve looked at some of the important factors that have the potential to influence the demand for these rare assets.

These factors include, though are certainly not limited to, what’s happening with both interest rates and inflation, as well as developments in other asset markets, including residential real estate, other commodities, and even cryptocurrencies.

We also look at the latest news coverage from around the world as it pertains to the pink diamond market directly.

Interest rates and inflation continue to rise

On Tuesday 6th September, the Reserve Bank of Australia increased interest rates by 0.50%. It was the fifth month in a row that they have lifted the local cash rate, which now sits at 2.35%, its highest level in nearly 10 years.

The decision, which was widely anticipated by pundits who commentate on financial markets, is in line with global trends, with central banks around the world increasing rates multiple times in 2022. This includes the European Central Bank, who also met last week, and decided to raise interest rates across the Eurozone by 0.75%.

Back to Australia, and while the RBA obviously keeps a watchful eye on incoming data, there seems little doubt at this stage that they will continue to raise rates each month until the end of the year at least, with consensus expectations suggesting interest rates will rise toward 3.60% by May of next year.

While on the surface these rate rises would appear positive for savers, it needs to be remembered that headline inflation rates are currently already sitting at 6.1%, with this number expected to rise to the 7.5-8% range by Christmas of this year.

As a result, those with money in the bank are still going backwards in real terms.

Like rising interest rates, the scourge of higher inflation is also being felt across the developed world, not just in Australia, with Europe and the United Kingdom in particular being hard hit.

In England for example, inflation is expected to hit 18-20% in the next few months, with the government having to effectively implement price caps for households to try and limit otherwise skyrocketing energy bills.

It also continues to be a problem in the United States, with inflation rates still north of 8%, their highest level in decades, with updated figures set to be released later this week.

Given this backdrop, money in the bank doesn’t seem like such a great way to save, even though it’s now generating some interest again.

Normally, such low real interest rates would be expected to spur more housing demand, and higher property prices, but even that’s not the case this time around.

Indeed, here in Australia, the local property market had its biggest monthly decline in the better part of 40 years in August, with prices now having fallen for almost 20 weeks in a row.

The falls continue to be led by major east coast cities (Sydney and Melbourne) as evidenced in the chart below from this article.

Australian dwelling values index

Chart of Australian dwelling values index

Source: CoreLogic.

Commodity markets and cryptocurrencies aren’t faring any better either, with oil prices having recently fallen, while Bitcoin has fallen by almost 10% in the last month and is now trading just north of USD $20,000 per coin, down 55% for the year.

Given these developments, it’s not hugely surprising to see that people are looking to acquire assets that up until now they may not have looked at.

Pink diamonds are one such commodity, with higher demand for these assets driven by their rarity, exceptional beauty, and historical price growth.

Pink diamonds in the news

Speaking of pink diamonds, there has been no shortage of commentary surrounding these rare assets in the mainstream media of late.

The pick-up in coverage started several weeks back, when news of a 170 carat pink diamond (claimed to be the largest gemstone uncovered in up to 300 years) first came to light.

Sotheby’s recently unveiled an 11-carat fancy vivid pink diamond named the “Williamson Pink Star”, which is expected to fetch up to $20 million in an auction scheduled in October.

We’ve also seen news out of Asia that hedge funds and other professional investors are allocating more of their portfolios to collectibles, which can include pink diamonds.

The Financial Review also recently published an article looking at the jewellery market, which noted the circa 500% growth in pink diamond prices from the Argyle Mine over the past two decades.

It’s not just Australia either, with publications in the UK covering the pink diamond market, looking not only at the growth in pink diamond prices, and how that compares to other assets, but also some of the factors anyone interested in acquiring a pink diamond should consider before purchasing one.

We are pleased to see this level of coverage for pink diamonds, including the focus on “what to look for”, as it very much aligns with Australian Diamond Portfolio’s focus on education.

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


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