02 May

No news is good news

Today’s market update touches on two key themes relevant for the pink diamond market, and for investors in this asset class.

The first theme is the news flow, or lack thereof, when it comes to the pink diamond market today, and why this is reminiscent of the other periods in market history where pink diamond prices surged.

Secondly, we look at the historical ability of pink diamonds to act as a sanctuary or safe haven for investors in tough times, and why more and more economic data suggests that these safe haven qualities will be more valuable than ever going forward.

Read on for more below.

Pink diamonds a sanctuary for investors

When people think of pink diamonds as an investment, it’s typically their strong long-term gains, and their ability to outpace inflation that most attract investors. Their tangibility, the fact that they are wealth you can touch and hold, is also a factor.

The other key driver is the protection they can offer, especially when traditional assets like share markets suffer big falls, as they often do.

We think that this attribute which pink diamonds offer will only grow in importance across the rest of this year and beyond. While markets have crept higher for most of 2023, there remains an ever-present threat of another major sell off.

Inflation is still high, governments are trying to rein in spending to some degree, and interest rates for now continue to push higher, though perhaps not for much longer.

But the bigger issue is that it seems a near certainty now that the United States will enter a recession. A multitude of warning signals, from a near freeze in the housing market to inverted yield curves, all speak of tough times to come.

For further evidence of a likely recession, consider the chart below, which shows the leading economic index (LEI) in the United States. The LEI is essentially an index tracking a range of leading indicators, with this term meaning that the data traditionally gives a good indication of the direction that the economy is heading in.

As per the chart below, the LEI continued to decline in March. It’s now at levels that signalled a recession three times in the past twenty-plus years, with the recessionary periods appearing as the grey columns in the chart.

The annual growth rate of the US LEI continued to decline

Graph showing the annual growth rate of the US LEI continued to decline.

Source: The Confidence Board, Bureau of Economic Analysis (BEA).

In a recession, two or three things tend to happen:

  • Stock markets fall, as earnings that companies can generate get hit badly.
  • Policymakers switch gears, and tend to cut interest rates and increase deficits.
  • Investors lighten up their exposure to risky assets and go for safe havens they can trust.

These factors are bullish for hard assets, including pink diamonds.

The fact that this scenario is likely to occur with inflation already way beyond comfortable levels only makes the case for investing in genuinely scarce assets all the more compelling.

No news is good news

For about a year either side of the Argyle diamond mine closing in late 2020, there were pink diamond articles in the mainstream press almost every week.

Whether it was about the closure of the mine itself, the surge in demand that we saw from the onset of the COVID-19 pandemic through to late 2022, record prices being set at auction, or the very last of the annual Argyle Tenders, there was no shortage of media attention being showered on this discrete asset class.

In the last six months or so, the news flow has largely died down, with precious few articles about the pink diamond market, save for the odd one about auction houses selling off diamonds that fetch in the tens of millions of dollars.

The media will also likely continue to write about extraordinary pink diamond finds, witness the latest articles surrounding a 108-carat rough pink diamond unearthed by Storm Mountain Diamonds at its Kao mine in the Kingdom of Lesotho.

We think it’s important to share a few observations about the above trends in the media as regards the pink diamond market.

  • While it’s always interesting to read about high profile auctions or stories about huge diamond finds, they don’t represent the heart of the asset class as it were, just like TV shows about Hollywood stars and their mega-mansions don’t tell you much of value about the merits of investing, or not investing in real estate.The reality is that you don’t need tens of millions of dollars to invest in pink diamonds, with this asset class accessible from AUD $25,000 and above typically.
  • Secondly, while mining companies will continue to unearth the odd mega pink diamond, it doesn’t change how rare these assets are, nor the fact that their scarcity increased beyond comparison when the Argyle mine, which supplied 90% of the total global supply of pink diamonds, closed just over two years ago.This is important to keep in mind when it comes to investing in pink diamonds. You can have confidence that the supply of pink diamonds is extremely scarce, and that nature will prevent this from changing.
  • The lack of media attention is not a bad thing. Between 2005 and the end of 2019, there were also not that many stories about the pink diamond market.That didn’t stop prices rising by the better part of 600% over that time period, with pink diamonds outperforming pretty much every other asset class during the fifteen-year spell.Pink diamonds also provided much needed protection and diversification through periods like the Global Financial Crisis, when mainstream assets plunged. It’s also important to note that given their lack of volatility (which most investors quite rightly in our view see as a major strength), pink diamonds will never get the attention that share markets, commodities of cryptocurrencies will generate.

Given all of the above, the lack of news flow as regards the pink diamond market these days shouldn’t be seen as a bad thing.

Indeed, we think most investors in these assets will be more than happy if they stay out of the media, but continue to climb price-wise, replicating or indeed outpacing the performance that we’ve become use too.

Given the underlying supply and demand dynamics, that is exactly what we think is likely to occur.

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.


Share this