09 Sep

Not all diamonds make the grade

It’s hard to believe we are almost half way through September, with Christmas 2021 fast approaching. Like all of you no doubt, we hope that the situation with COVID-19, and the lockdowns and restrictions on our freedoms and movement are but a memory by the time Santa comes to town in a few months, and that 2022 is a better year for us all.

In this week’s market update we look at some interesting economic data which serves as a real wake up call for those thinking that the global economy is surging right now.

We also look at some interesting statistics on global diamond production, which reinforces why it’s so important to specialise in pink diamonds when investing in this unique asset class.

A wake-up call!

Two data points that we came across last week highlighted how fragile the global economy remains, which has important implications for how to invest in the years ahead.

In the United States, we saw the latest non-farm payrolls report, which is the most widely reported employment figure that market participants in the United States look at.

The report, which was released Friday night Australia time, showed just 235,000 jobs created in the United States in August. This was way short of market expectations, with analysts expecting closer to 750,000 jobs to have been created.

It also represents a notable slowdown relative to the average growth in the number of jobs created each month in 2021, which was 586,000 per month.

Crucially, both the unemployment rate (5.2%) and the total number of unemployed people (8.4 million) remain significantly higher than where they were in early 2020, before the risks from COVID-19 really started impacting the economy. Back then, the unemployment rate was just 3.5%, while the total number of unemployed people was just 5.7 million people.

Things are better than they were at the height of the crisis, but we are nowhere near a proper economic recovery, especially when one factors in the trillions in government stimulus, and the trillions of dollars of money that has been printed to support markets in the last 18 months.

We are seeing similar dynamics at play in Australia. While the official unemployment rate is lower now than it was before any of us had ever heard of COVID-19 (see graph below) the reality is far less encouraging.

Unemployment rate, Seasonally adjusted

Chart of unemployment rate, seasonally adjusted.

Source: Australian Bureau of Statistics, Labour Forces, Australia July 2021.

Consider that:

  • There are almost 275,000 more Australians on Job Seeker or Youth Allowance today relative to pre COVID-19 levels.
  • The government is spending $250 million more on unemployment benefits each fortnight as compared to the amount being spent before COVID-19 hit, an increase of 60%.

As this article in The Australian suggests; “Experts warned that the stubbornly high rate of welfare dependency in the wake of last year’s recession was evidence the labour market recovery had not been as strong as the official figures suggested.”

Note that this is before most of the official employment and GDP statistics inevitably get hit, as a result of the lockdowns that most of the East Coast of Australia continues to suffer through.

It paints a picture of an economy facing real challenges, and one that will take years, not months, to resolve. Given this background, it is clear that we will be living in an era of low interest rates, and more money printing for most of this decade.

With financial markets at record highs, the case for investing in hard assets, including pink diamonds, grows stronger than ever.

Not all diamonds make the grade

Not all diamonds are created equal, a point we often discuss with our clients at Australian Diamond Portfolio. Indeed, the vast majority of diamonds aren’t particularly rare, nor valuable, which is why it’s so important to specialise when investing in this space.

As evidence of this, we noted with interest an article published in Mining Weekly (headline below) last week, which stated that total diamond production is expected to increase by 1.4% this year. Botswana, Canada and Angola are all expected to see increases in output of between 15% and 40%.

Mining weekly headline.

The data, provided by analytics company GlobalData, found that in total, some 112.99 million carats of diamonds will be produced in 2021, with output increasing now that the worst of the COVID-19 disruptions that impacted the diamond industry last year have passed.

Forecasts suggest production will only grow from here too, with GlobalData suggesting total output from diamond mines around the globe will rise toward 125 million carats by 2025.

At this point, it’s worth revisiting a comment that we made in last week’s market update, where we noted ‘just how rare pink diamonds are, with just over one million carats of pink diamonds produced in the entire history of the Argyle Diamond Mine.”

Said another way, in any given year, the total output of all the diamonds (more than 110 million carats) produced globally is more than 100 times larger than the total supply of all the pink diamonds that were ever mined at the now closed Argyle Diamond Mine, over its circa four decade lifespan.

There are diamonds. And there are pink diamonds. There is a reason we specialise in sourcing only the latter for our clients.

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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