17 May

Past performance and future performance – the outlook for pink diamonds

One of the most common phrases that you will hear in the investment world, and one that is entirely true by the way, is that past performance is no guarantee of future performance.

Assets that at times soar in value, like cryptocurrencies, often then turn around and crash, with paper profits that at one time looked life changing, turned to dust. On the flip side, other markets that may have suffered, sometimes for years, end up turning a corner and outperforming other assets.

As a result, while it’s critical to pay attention to past performance, it’s even more important to analyse the prospects of a particular asset.

We delve into this topic, and why it’s relevant for pink diamonds below.

60% vs 0% – which asset do you choose

The topic of past performance, and comparisons to other asset classes is highly relevant to pink diamonds today given recent performance trends in this niche asset class, and how that performance compares to other, more mainstream asset classes.

For example, if we look at the pink diamond market, Australian Diamond Portfolio’s Pink Diamond Index (ADPPDI) shows that prices across the board have risen by about 60% since the Argyle mine in Western Australia was closed.

By contrast, the share market has basically gone nowhere in that two-year period, as the below chart highlights (we are talking the S&P 500 in the United States as our proxy for share markets the world over).

S&P 500 Resistance…

A graph showing S&P 500 Resistance

Source: Topdown Charts, Refinitiv Datastream.

Most investors will look at this data and make one of two potentially over-simplistic assumptions:

  1. Pink diamonds have massively outperformed, and are therefore better investments than the share market, so I’ll buy pink diamonds, or
  2. The share market is massively lagging the pink diamond market, and that won’t continue for ever, hence I should buy shares.

The smartest investors though, will ask themselves at least two more questions…

The first of these, is where does each asset sit in their portfolio, and which one best helps minimise risk and maximise profit potential. The second one is a question about whether the catalysts that have driven the stagnation in the share market, and the huge surge in pink diamond prices are likely to dissipate going forward, or in fact strengthen.

We believe an assessment of these catalysts, and the considerations around a portfolio of assets still strongly favour investing part of one’s wealth into pink diamonds.

We say this for two key reasons…

From a portfolio perspective, most investors are already heavily exposed to financial assets (shares, bonds etc) and/or assets that do well when the economy is performing strongly, and inflation and interest rates are low to moderate (real estate). Pink diamonds by contrast tend to thrive when inflation is high and have historically insulated investors from weakness in the economy and the share market. As a result, it’s fair to say that for most, not all, investors, an allocation to pink diamonds will likely help diversify their portfolio and leave them better protected in an environment where inflation remains stubbornly high.

Moving on from the diversification angle, and if we look at the recent catalysts that have driven the respective performance of the share market, and of the pink diamond market, has anything really changed?

Has inflation gone away? Not at all, it remains a huge challenge and will likely stay that way for years.

Is the economy now booming, or at risk of recession? The risk of recession rises by the day, with a slew of indicators suggesting that we will see one within the next year in the United States, and possibly in Australia, especially on a per capita basis.

Given this backdrop, the risks in the share market remain very high.

By contrast when we look at pink diamonds, what do we see?

We see an environment where supply of new pink diamonds to the market remains largely non-existent given the closure of the Argyle mine, and this will remain so for years to come.

We see an environment where every day, more investors want to own these assets – for a variety of reasons from inflation protection to portfolio diversification to the base human desire to own items of extreme rarity and physical beauty.

Commodity cycle still favours pink diamonds

There is one final factor, and it’s a critical one, that suggests pink diamonds will remain a market leader for years to come: the commodity cycle.

For a variety of reasons, commodities tend to move in long cycles (a decade at a minimum) where they either vastly outperform, or vastly underperform, mainstream financial assets like the share market.

This can be seen in the chart below which shows the ratio of the Goldman Sachs Commodity Index (essentially an index of a large basket of commodities from copper to iron ore, to wheat and oil) vs the S&P 500, which is of course the main share market index.

The lower the line on the chart, the more that commodities have underperformed shares, and vice versa, with the chart below (which comes from Visual Capitalist) demonstrating very clearly that for most of the last decade, commodities have plunged vs the share market.

Infographic showing commodities vs equity valuations

Source: Incrementum AG, Crescat Capital LLC, Tavi Costa, Bank of England.

That underperformance has now stopped, with the chart starting to rise, meaning commodities are now outperforming. If history is any guide, that outperformance will last at least the better part of the next 10 years, potentially making commodities one of the must hold investments of the next decade.

Pink diamonds can’t help but benefit from this trend.

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.


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