17 Nov

Join the (pink) diamond hunt

It’s been another interesting week in financial markets, with US inflation rates coming in at more than 6% per annum, consumer confidence in the world’s largest economy beginning to crumble, and some volatility starting to creep into equity markets.

Despite this, investors remain optimistic – with allocations to risky assets at all-time highs.

In this week’s market update we look at three non-diamond specific factors that all contribute to why we remain so bullish on the outlook for pink diamonds and discuss why buying physical pink diamonds themselves is the safest way to get exposure to this asset class.

See more below.

Three charts that have us bullish on pink diamonds

Regular readers of our In the Loupe series know that our view on pink diamonds, and why we think they will continue to provide market leading investment results, is driven both by the factors unique to diamonds (scarcity, beauty, tangibility), as well as other factors that relate to markets.

Below – we want to touch on three market related matters that reinforce our bullish outlook for pink diamonds.

Concentration and risk in financial assets

There are a range of metrics one can use to highlight how risky share markets are today. These include the fact that many are trading at or near all-time highs, and that some, for example the S&P 500 in the United States, are trading at valuations that have only been exceeded once in the last 120 years, which was back in 1999, just before the market crashed.

This week we wanted to share a new warning, which can be seen in the chart below, which highlights the percentage of the S&P 500 that is made up of just the top 5 companies.

The Five Largest Stocks in the S&P 500

Chart of 5 largest stocks

Source: S&P, Dow Jones, Bloomberg, Bianco Research, L.L.C.

As you can see, it has exploded in the last ten years, and is now back at almost 25%, the highest it’s been since the middle of the 1960s. This is a troubling indicator, as it suggests the market as a whole isn’t doing that well, rather just a few large companies are.

History suggests large drawdowns and greater volatility are ahead of us, based on how concentrated the market is today.

Inflation risks

Last week we found out that consumer prices in the United States are now rising at more than 6% per annum, the highest level seen in the better part of 30 years, with these higher prices already causing consumer confidence to plunge.

Sadly, it may get worse before it gets better, with rent (a major contributor to consumer price changes) increasing, while fertilizer prices, which impact the price of pretty much every food item on the planet, are skyrocketing, as you can see in the chart below.

Feritlizer prices have gone ballistic, a rise in food insecurity may follow 

Chart of fertiliser prices

Source: Macrobond and Nordea.

Despite the hope from policy makers that the recent spike in inflation will prove transitory, the data is suggesting higher prices are set to plague households, and therefore the economy, and markets, for years to come.

Central bank risk

The third risk factor is central banks themselves, who are now trapped in providing support to financial markets and to the economy, even though inflation rates are spiking.

This is evidenced through the chart below, which covers a 30-year timeline, and highlights the fact that the US Federal Reserve (The Fed) has monetized (i.e. printed and purchased) a large portion of Treasury Debt in the United States.

The economy, as fragile as it is, would simply not function without this stimulus, which is why The Fed is so reticent to remove it, even though economic growth has improved, the worst of COVID-19 appears behind us, and asset prices have soared to all-time highs.

The Fed Has Absorbed a Significant Portion of the Increase In Outstanding Debt

Chart of outstanding debt

Source: Federal reserve, Treasury, TD Securities.

There is no easy way out, and The Fed knows it.

Combined, these factors suggest that the next ten years may see negative real returns on financial assets, as higher inflation, coupled with extreme volatility and pullbacks in equity markets disappoint investors.

It also provides a very strong reason to consider investing in hard assets like pink diamonds, which stand a much better chance of prospering.

Join the (pink) diamond hunt

We’ve been pleased to see multiple mentions of the Australian Diamond Portfolio Pink Diamond Index (ADPPDI) in media reports and articles since it was first released roughly a fortnight ago.

In the last week, the results from the ADPPDI, which showed an average 30% increase in the price of pink diamonds in the last financial year, have appeared in a number of articles, including this one in Small Caps, titled “Amid dazzling returns, is now the time to join the diamond hunt?”, which was originally published on Switzer, and republished and/or syndicated in a number of places, including Livewire Markets.

While the article is more stock focused, looking at the handful of companies that are exploring for diamonds, the article does highlight just how rare pink diamonds are, how small a share of Argyle’s output they made up, and of course the fact that the Argyle mine is now closed.

And while we have money in the stock market ourselves, there is no question that investing in a company that may or may not find and may or may not be able to commercially extract diamonds in the first place is an order of magnitude riskier than investing in the diamonds themselves.

This is especially the case with coloured diamonds, given their history of strong price appreciation, and their genuine scarcity, which has only become more of a factor in the past twelve months.

At best, the next Argyle is decades away from being found. In reality, we’ll never see anything like it again.

Combine this with the economic reasons discussed above, and we remain convinced that the outlook for pink diamonds is incredibly positive, with demand, and price growth likely to stay strong for years to come.

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.


Share this