Following on from last week’s article where we compared diamonds with gold, this week’s “In the Loupe” is going to look at superannuation.

This is another very popular topic amongst the more than 10,000 investors who receive our “In the Loupe” newsletters, which is no surprise given superannuation is for many Australians the largest and fastest growing financial asset they have.

We are going to be looking at this from two angles, firstly comparing the long-term returns of diamonds to the returns on superannuation funds, as well as other characteristics that are important for investors.

After that we are going to look at how your superannuation can be used to invest in rare coloured diamonds.

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At Australian Diamond Portfolio, we get asked a lot of questions about rare coloured diamonds, and the key drivers of the market. For this reason, our regular ‘In the Loupe’ market updates typically focus on the supply and demand factors impacting diamonds, and why we think prices will move higher in the coming years.

This week we wanted to write an article specifically comparing rare coloured diamonds with gold, as this is a question we are often asked by our clients.

Over the next few weeks we will follow up with other articles comparing rare coloured diamonds with housing, and also look at diamonds in the context of superannuation investments, another popular topic amongst our client base.

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The aptly named the ‘Bubble Gum Pink’ diamond. A 3.43 carat internally flawless Fancy Vivid Purplish Pink, which sold for AU $11 million at Christie’s in Hong Kong this week.

The case for investing in rare coloured diamonds gets stronger by the week, with a much-anticipated interest rate cut delivered by the Reserve Bank of Australia (RBA) yesterday.

Markets were expecting the cut, so it didn’t come as a shock, and indeed the Australian dollar actually rose after the decision was announced, though we expect it’s just a matter of time before more currency weakness comes into play.

The RBA decision, which brings the cash rate to a new all-time record low of just 1.25%, likely won’t be the end of the stimulus measures we see from the RBA in the coming year.

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In this week’s update, we wanted to share some insights from the overwhelmingly positive feedback we received at last week’s Australian Shareholders’ Association (ASA) National Conference, as well as key questions we were asked at our recent Diamond Master Class held in Sydney.

Combined, they reinforce why the outlook for pink diamond prices is so positive for the years ahead.

Starting with the ASA conference, aptly titled; “Investing in the Age of Uncertainty,” it was a real pleasure to speak to several hundred knowledgable and passionate investors about the opportunities pink diamond investments offer.

Speakers at this year’s Australian Shareholders’ Association Conference.

There were a handful of key themes we picked up on in our conversations with the investors who attended, and they all bode well for the future direction of pink diamond prices.

1) People didn’t realise they could buy diamonds in their SMSF

The fact that you could invest in pink diamonds was news to a lot of the attendees, who didn’t realise they could diversify their portfolios with this asset class. Given SMSF’s as a whole have over AUD $700bn of funds to invest, we think there is still plenty of diamond buying demand to come from this section of the market.

2) Hardly anyone knew the Argyle Mine was set to close

The fact that the Argyle mine is set to close in 2021 was a real eye-opener for many of the investors we spoke too. These people are savvy enough to have accumulated large portfolios over their working lives, and they understand what a massive reduction in supply can do to the price of an asset class that is seeing strong demand.

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Despite all the polls suggesting a Bill Shorten led Labor party would romp to victory in the just completed Federal election, Scott Morrison retained the Prime Ministership, with the Coalition looking like they will be able to form a majority government.

The result, whilst unexpected, has so far pleased the markets, with the ASX, and banking stocks in particular, enjoying a solid rally in the first two trading days of this week.

This short-term (and we want to stress short-term) reaction was entirely to be expected, as a Labor loss has allayed the fears of many investors in both the Australian property market, and the Australian share-market.

This is because Labor’s proposed changes to franking credits, negative gearing, and capital gains tax, are all now confined to the dustbin of history.

Whilst this has undoubtedly come as good news for some (the mood at the recently completed Australian Shareholders’ Association National Conference, of which we’ll write more about next week, was one of jubilation at the result), it’s important that investors look past the noise of day to day market moves, and keep an eye on the big picture instead.

And this big picture is entirely unaffected by the events of the weekend, and like it has for the last fifteen plus years, continues to support investing in tangible discreet assets like pink and blue diamonds.

Why do we say nothing has changed?

It’s simple really – and it all comes down to the fact that, despite the election result, the Australian economy (which has been run by the Liberal party for the last few years), remains incredibly weak.

The best evidence on this was seen on Tuesday, when the Reserve Bank of Australia all but guaranteed interest rate cuts are coming. The RBA always has to be somewhat cautious in how it communicates with the market, but Phil Lowe, the current governor, stated that when the RBA meets in June, it “will consider the case for lower interest rates.”

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There are many factors that give us confidence about the outlook for pink and blue coloured diamond prices in the years ahead.

There is the strong historical performance, the fact that they are effective portfolio diversifiers, that they have proved better long-term investments than cash in the bank (especially now that interest rates are so low) and the fact that as discrete, tangible assets, they are growing in popularity amongst investors wanting to secure their wealth.

Finally, there is the rarity of the stones themselves – a factor that will be enhanced by the imminent closure of the Argyle mine by 2021.

These are themes that we discuss regularly with our clients at Australian Diamond Portfolio, either via emails, or in our Diamond Master Classes and consultations.

In this update though, we wanted to share with you another insight which helps highlight the strong demand for rare pink and blue diamonds. That insight is the operating results for the Argyle Mine itself, and the returns it is generating for its owner, Rio Tinto.

Whilst Rio Tinto makes the vast majority of its money from iron ore and aluminium, its diamond business does add to its bottom line, with a fascinating article in the Financial Review published in early May 2019 pointing out that revenues from the Argyle mine had soared to their highest levels in a decade.

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This week the Fancy Colour Research Foundation (FCRF) released their latest performance figures for coloured diamonds.

Pink diamonds, which the vast majority of Australian Diamond Portfolio clients invest in, rose by 0.5%, with gains for local investors magnified by a slight decrease in the value of the Australian dollar since the start of the year.

Pink diamond prices were primarily driven by larger Vivid Pinks, which were up by more than 3% for the quarter, a return that would equate to more than 12% for the year, should the pace of the gains be maintained across the rest of 2019.

The steady increase in the prices for pink diamonds over the first quarter of 2019 are consistent with what we have seen over the last several years. Since 2005, there have been some quarters where prices rise incrementally, whilst in other quarters we see much larger increases, with pink diamonds rising almost 400% over this time period.

The rarity of these pink diamonds will of course only be enhanced by the imminent closure of Argyle Mine by 2021, and this is one of the primary reasons why Australian Diamond Portfolio specialise in sourcing high quality pink stones for our clients.

Adding to our confidence in the outlook for pink diamonds is the risks that continue to build in the economy.

In financial markets, whilst the last quarter was positive for shares, it occurred against a backdrop of a slowing global economy, with manufacturing data around the world going through its longest losing streak ever in terms of output, whilst global trade volumes recently recorded their biggest falls since the Global Financial Crisis (GFC).

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Last week was another great reminder of why investors are turning to tangible safe haven assets like rare pink and blue diamonds.

In Australia, we saw the release of official inflation figures, which came in flat for the quarter, and up just 1.42% for the year, the lowest rate on record.

It led to two rapid outcomes, both of which are good for diamond investors.

1. The Australian dollar fell rapidly, at one point falling below USD $0.70, and
2. Odds of an interest rate cut by the Reserve Bank of Australia strengthened noticeably, with some analysts forecasting that the RBA will cut rates when they next meet in early May.

An interest rate cut, when it comes, is unlikely to be a one-off, as the following chart from the ASX indicates.

The chart, for those who’ve not seen it before, plots current market expectations for interest rates all the way out to September of 2020, with the purple columns highlighting where the market thinks rates will be on a month by month basis between now and then.

As you can see, at present, the market is forecasting rates will be below 1.25% by July 2019, indicating one interest rate cut within the next three months. By February 2020, rates will be below 1% based on current market pricing.

Whilst lower interest rates might be good news for homeowners or property investors with big mortgages, they are a disaster for those living on their savings, who are all going to get a pay cut in the coming months if rates decline from their already record lows.

Quite naturally, this will lead to two outcomes:

1. With less disposable income coming in, these savers will cut back their discretionary spending.
2. They’ll look for investment alternatives to low yielding cash, of which rare coloured diamonds will be one.

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Up and down the East coast of Australia, it seems almost everyone is focused on the property market.

This is something we expect will continue for the foreseeable future with the Federal election now less than a month away, and a range of changes to how property is taxed set to be implemented in the months that follow.

And whilst many property investors are hoping that the decline in house prices is over, it’s not looking that way, with research from Morgan Stanley suggesting house price falls will continue for the rest of the year at the very least.

The chart below, which comes from Morgan Stanley, shows the movement in their own proprietary housing market model, and the change in house prices, over the past 25 plus years.

As you can see, they are highly correlated, and it suggests further price declines ahead; with Morgan Stanley stating; “housing weakness is likely to persist through to the end of the year at least, with further downside to both approvals and prices.”

Developments in the local housing market will likely spur rare coloured diamond demand and prices for a handful of reasons.

The first and most obvious is that as prices fall, investors will look for alternative assets to protect and grow their capital.

Rare coloured diamonds will be one such asset class that will benefit from these capital flows.

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As Australian Diamond Portfolio welcomes master diamond cutter David Burger to the team, we take a look at how David came to cut some of the most valuable diamonds ever unearthed.

This article originally appeared in Wish by The Australian – September 2015.

In the world of diamond cutting, there is no room for trembling hands or a faint heart. Rio Tinto’s latest argyle pink tender is the jewel in the crown of David Burger’s long career.

Billions of dollars of the world’s finest diamonds have passed through master craftsman David Burger’s hands during his 40-year career, which he describes as a passion, not a job. At the age of 65, Burger is hanging up his tools and retiring from a profession he has a great love for and one that is a dying art in Australia’s diamond industry.

Born and bred in Johannesburg, South Africa, he emigrated to Australia in 1981. Six years later he started work for one of the world’s largest miners, Rio Tinto, crafting the exquisite pink diamonds from its West Australian Argyle mine. During his 27 years at Rio he has cut and polished the finest of Argyle diamonds, including reds, pinks, blues and yellows.

Burger, who polished the world’s first million-dollar-per-carat purplish red diamond in 1997, has cut and polished the vast majority of Argyle’s tender diamonds for the past 25 years. He worked on almost half — 29 out of 65 — of the stones in this year’s pink diamond tender, which is known as the “Connoisseur’s Collection”. The 65 diamonds weigh a total of 44.14 carats, including four “Fancy Red” diamonds. The 2015 Argyle pink diamonds tender has already had viewings in Sydney, Hong Kong, New York and Perth, with bids set to close on October 21.

The names of some of the best diamonds in this year’s tender have been inspired by the world of ballet, in recognition of Rio’s partnership with the Australian Ballet. One of the top stones this year is the “Argyle Prima”, a 1.20ct fancy red pear-shaped diamond.

Above, David Burger, in the diamond business for 40 years, examines a rare Argyle pink. Right, Ocean Seer, a deep grey violet octagonal.

Burger says his passion for the diamond craft was born in the 1960s through a family friend in South Africa, who introduced him to the profession and helped him sign on to a five-year apprenticeship. He says it was a close-knit industry and you needed to know someone to break in. Once in, he soon realised he had a skill for the “fancy” stones.

Lovers of diamonds marvel at the sparkle, shape and size of the precious stone, but before it is shining in a shop window, or being displayed around the world in an exclusive high-level tender, it starts life as a “rough”. Burger revelled in the task of extracting the maximum beauty and price out of what natural forces and time had created. Sitting at a work bench in the high security offices in Perth, he would examine a rough diamond and says he knew in 10 minutes what he would create.

“When I look at a stone in the rough, as I assess it I look at where the flaws are situated, what the shape of the rough is and more and more my mind starts working what it will make out of it,” he says. “When you see a piece of rough and it’s extraordinary you get excited and start thinking what am I going to do with that.” He explains that a diamond has 58 facets and through his five-year apprenticeship he was taught about the structure of a diamond and how it runs on the wheel.

“It’s not just like a semi-precious stone where you can put it in the tool and on the wheel and it rotates and polishes,” he explains. “A diamond has grain like wood, and knots like wood, so you have to find the running plane, and you have to plan the stone from the very beginning because your very first facet will determine where all the other facets will run.”

The master craftsman has twice visited the Argyle mine, home to the stones he has worked on over 27 years. The second trip was this year — but it was not for reasons of business or mere curiosity. He was there to attend a smoke and water cleansing ceremony. The local indigenous community had invited him there because he had polished a stone, named Lady in Red. When that stone was photographed, the image of a lady appeared in the photo and the traditional owners believed Burger had stolen the spirit of the lady from the Kimberley and requested he be cleansed. It’s an experience from an eventful career he says he will fondly remember in retirement.

Burger, who looks at the diamond with his left, short-sighted eye, says it takes anywhere from two days to a week to finish a stone, which goes on a one-year journey from mine to sale. “It is an art and a passion, it’s not just a job,” he says. “Once you’ve made a decision on doing something and it works out to the size and colour you had in mind, there is a tremendous sense of satisfaction.”

Burger’s boss, Shauna Holdsworth, says his artistic flare was amazing, explaining that he can visualise in 3D the final product even before the technology is applied to it. “He sits down and sketches,” says Holdsworth, the manager of operations at Argyle’s specialist cutting and polishing facility. “You follow his pencil drawing to put the stone together, so you have to listen to the polisher. You can have all the inputs in the world through technology, but if that stone doesn’t run like Dave said, then you have to readjust.”

Burger says some stones are more trouble than others, and a craftsman needs to be confident in his skills — there is no room for self-doubt: “If you don’t have strong nerves, this isn’t the job for you.”