After more than two decades in the diamond and gemmology market, many of which I’ve spent specialising in pink and other coloured diamonds, I can assure you that no two days are the same.
And that’s because coloured diamonds are all unique, from cut, to clarity, to colour, to shape and size.
The one quality they do share, is that they’ve displayed strong long-term price growth, and just as importantly, they’ve done this with minimal volatility, and minimal drawdown.
Pink diamonds tend to oscillate between years of steady if not spectacular returns, and then other years where they soar, with some of their strongest performance occurring in periods other markets are falling.
And while slow and steady performance might not get as many headlines as faster moving asset prices, it delivers over the long-term, which is ultimately the most important thing for many investors.
Never has that been more clear than in the past week, where financial markets bounced around in a somewhat haywire fashion. Stock market investors were happy, as share prices rallied hard (more on this below), but that doesn’t change the fact that many equity markets remain down 20-30% in real terms this year.
It’s been even more rough for cryptocurrency investors, with the collapse of high-profile exchange FTX enough to see Bitcoin trade down toward USD $15,000 per coin, down almost 80% from its peak around a year ago.
Pink diamonds on the other hand, while not capturing anywhere near as many headlines, continue to deliver, as we explain below.
Another strong quarter for pink diamond prices
We are delighted to announce that the Australian Diamond Portfolio Pink Diamond Index (ADPPDI), showed another strong period of price growth, with pink diamonds as a whole rising by 3.6% in Q3 2022.
Note that the ADPPDI is based on the average performance of the three main categories of pink diamond, with a performance breakdown by category seen below:
For those of you who are reading about the ADPPDI for the first time, it’s a proprietary index using more than 15,000 pink diamond prices supplied by our global trade partners and provides unparalleled insight into performance trends within this unique asset class.
While the pace of price growth slowed in Q3, it’s still a price increase that would translate to more than 10% per annum returns, with our global trade partners noting that prices, while still increasing, had taken a bit of a breather from the explosive growth we saw in the aftermath of the closure of the Argyle mine.
Since that closure, which took place two years ago, pink diamond prices have now risen by more than 60%, strongly outperforming most other asset classes in the process.
Inflationary decade to push diamond prices higher
Last week was a very interesting one for financial markets. Stock markets, commodities and a range of other assets all rallied pretty hard, with some equity markets rising by as much as 5%, after the release of inflation data from the United States that suggested consumer prices are now rising by only 7.7% per annum, down from a 9.1% per annum rate of price increases that we saw earlier in the year.
While it’s good that the pace of inflation is slowing down, we’d make three points:
- An increase of 7.7% is still very high, way outpacing wages growth, or interest income one can earn in the bank.
- Markets are still not taking inflation seriously, expecting inflation to average barely 2.5% over the next ten years.
- History suggests that inflation is likely to average closer to the 5-6% per annum range between now and 2030, with a recent study from Deutsche Bank finding that once inflation goes above 8% (which it did earlier this year), it typically takes up to two years for it to return to a 6% level.
The Deutsche Bank study, which looked at more than three hundred episodes of high inflation through history, in both developed and emerging markets, also found that once inflation eventually falls from 8% per annum back toward 6% per annum, it then tends to maintain those levels for the next five or so years.
This is the chart Deutsche presented in their study, which shows the median (pink) line, which is based on historical observation, as well as current US and Eurozone cycle lines, which are based on current market expectations.
All sample countries from 1920 (318 observations)
Given this backdrop it seems a relatively safe bet to assume that those who think inflation will soon largely disappear are going to be disappointed, and that money in the bank is likely to be going backwards in real terms for years to come.
And while this inflation outlook is worrying, there is little any of us can do as individuals to influence it. We will all have to deal with it in our own way.
From an investment perspective, history is very clear that most people go backwards in real terms during periods of high inflation, while a smaller portion of the population manage to increase their wealth.
Those that prosper tend to do so first by preparing for the fact that inflation is set to stick around, and then arrange their portfolio in such a way that it has a meaningful allocation to the kind of assets that not only maintain but actually increase their purchasing power in such environments.
Pink diamonds have shown their worth in such periods in the past.
Given that they are now more scarce than they have ever been as a result of the closure of the Argyle mine in 2020, and remain as beautiful, desirable, and discrete as they always have, we believe that demand for these assets will remain strong for as long as we remain in a high inflation environment.
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.