17 Oct 2019

Investing in a World of Global QE

Last weeks’ “In the Loupe” update focused on the likelihood that interest rates in Australia will fall all the way to zero at some point in 2020 and stay very low for years to come. Indeed, if we use the bond market as a guide, we can expect rates to stay below 2% until at least the middle of the 2030’s, some fifteen years from now.

This is worth keeping at the forefront of your mind when it comes to assessing how you are protecting and hoping to build wealth over the next decade and beyond.

The outlook for interest rates, which is one where essentially no income can be earned on cash left in the bank anymore is troubling enough, but the challenge for investors doesn’t end there.

Central banks, in their desperate bid to stimulate higher growth and inflation, are not going to stop once interest rates have hit zero, with the potential for large scale quantitative easing (QE) or money printing likely to take place all over the developed world in the decade ahead.

We came across a great article dealing with this very phenomenon over the weekend. Titled; “QE, for the sake of…It”, it was written by Nick Hubble over at the Daily Reckoning, and it looked at the evolution of money printing over the last decade or so.

As Nick highlighted, and we have paraphrased below:

  • Before the GFC hit, QE was something countries like Zimbabwe or Venezuela did.
  • Then QE became an emergency policy to reliquidate banking systems around the world in 2008.
  • After that, QE became a way to boost asset prices to encourage the ‘wealth effect’, in the hope people would spend more.
  •  Following on from that, QE was about encouraging more debt, which central bankers consider to be synonymous with economic growth.
  • Then QE became a way to improve the overall economy. But it didn’t.
  • QE has also been used to bail out government, by lowering their borrowing costs and allowing them to run larger fiscal deficits than they otherwise would have.

Now it seems that around the world, central banks are doing QE just for the sake of it. The global economy, whilst seeing slowing rates of growth, is still humming along, with unemployment rates in countries like the United States near record lows.

Meanwhile, bond yields are at their lowest in millennia, whilst stocks are near all-time highs – so there is no justification for using QE to prop up financial markets.

Yet QE is being deployed anyway, with the European Central Bank buying 20 billion Euro a month worth of bonds, whilst the Fed is also expanding its balance sheet again, in an attempt to quell any funding issues in the US banking system, with repo rates surging in the last month. This can be seen in the chart below.

US Overnight Repo Rate Surges

Overnight repo rate

Source: Refinitiv via Financial Times

That is not a healthy sign, and the actions central banks are taking to forestall any crisis prove that all is not well with the economy.

As investors we have no control over the broader economic environment, nor the approach policymakers will adopt in order to keep the system afloat.

All we can do is control our own investment decisions. To that end its incumbent on us to be aware of these trends in central bank money creation and how they’ll impact asset classes in the years ahead, including pink diamonds.

As we have discussed in the past, the inflation of the money supply will drive investors toward hard, tangible assets with a proven performance track record. Pink diamonds are one such asset class, with the policies currently being implemented by central banks making us more convinced than ever that the next decade will be a positive one for diamond investors.

Diamond Prices going from strength to strength.

Earlier this month we saw further confirmation of the underlying strength of the rare coloured diamond market, with a number of items designed by Van Cleef and Arpels, which were auctioned at specialist auction house Bonham’s fetching very impressive prices.

An emerald cut, 2.17 carat, fancy intense blue, VVS2-clarity diamond sold for $2.5 million, whilst a cushion modified, 24.64-carat fancy-yellow diamond ring sold for almost $320,000, despite estimates suggesting it might only be worth $270,000.

That was trumped by A square-shaped emerald-cut, 6.09-carat, fancy-vivid-yellow, VVS2-clarity ring which sold for $312,575, some 70% more than its $180,000 estimate.

blue diamond ring

Rare 2.17 carat blue diamond ring sold at Bonhams for US$2.5 million. Image © Bonhams.

As Bonham’s senior international jewellery director Brett O’Connor stated; “rare and coloured diamonds achieved notable prices in a full auction room with bidding coming from around the globe. The sale…far [exceeded] its presale estimate.”

Whilst its quite natural that it’s the highest profile diamonds that garner the most media attention, rest assured the strong bids for diamonds we see at the top end of the market cascade down across the entire rare coloured diamond sphere.

Sales like the ones highlighted demonstrate how strong the appetite for rare coloured diamonds amongst high net worth investors is. This will only increase if there is an uptick in market volatility, greater uncertainty regarding the outlook for the global economy, or an increase in inflation, which is almost certain to come in time due to the money printing excess central banks around the globe have committed too.

Given these trends, it’s no surprise to us that every day, we are seeing demand for rare coloured diamonds from our clients of Australian Diamond Portfolio, who are looking to protect and grow wealth in these unprecedented times.

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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