09 Nov

Pink diamond momentum continues to build

As regular readers of our market updates will know, pink diamonds have had a great run in terms of price growth over the last two years, building on an impressive track record that dates back to the early 2000s.

Indeed, these assets lead all other mainstream investments over that time period.

Since the closure of the Argyle mine in 2020, which was the source of circa 90% of all pink diamonds mined globally, media attention focusing on this asset class has grown dramatically, driven both by their strong investment fundamentals, and their genuine rarity and beauty.

The media coverage has continued this week, with news of an exciting new pink diamond exhibition taking place in Melbourne, which we discuss below.

We also look at a couple of indicators that demonstrate how hard the current market environment is for investors in traditional assets, combined with three risk factors that suggest it’s going to get harder, not easier, going forward.

Combined, these trends bode well for pink diamond demand, and pink diamond prices, as we will highlight.

The Argyle Violet, a 2.83 carat Fancy Deep Greyish Bluish Violet diamond

The Argyle Violet, a 2.83 carat Fancy Deep Greyish Bluish Violet diamond. Image source: L.J. West

Pink diamonds making the news

In the last few months, there has been a notable uptick in media articles covering the pink diamond sector, with much of this coverage driven by the record prices high-end pink diamonds are fetching at auctions.

Exposure for this market continued to grow last week with the announcement that the Melbourne Museum will be hosting a Pink Diamonds exhibition until late January next year. The jewellery specific media, and more importantly the mainstream media covered the story.

The exhibition, which will showcase the largest collection of Australian pink diamonds in the world, will include more than 100 gems and precious stones sourced from the Argyle mine.

The exhibition is headlined by the Argyle Violet, an incredible violet diamond surrounded by pink diamonds and set in a platinum ring. The 2.83-carat stone, which was acquired by L.J. West in 2016 is  believed to be the rarest in the world.

Needless to say, the Argyle Violet would be worth tens of millions of dollars, with William Gant, Australian managing director for L.J. West, stating that “It’s a very unusual stone; we posit that [it] is perhaps the rarest diamond in the world because of its characteristics.”

William went on to specifically note the diamond’s “colour, its size, just the amazing uniqueness of the origin of the colour as well” when describing the diamond, which he noted was technically not for sale.

From our perspective, exhibitions like this, and a multi month period in which Australians can go and see a large display of pink diamonds, as well as learn more about their origin, their scarcity, and how strongly their value has increased, can only be good for the sector.

A much-needed port in a storm

In the last week, we’ve seen further evidence and have come across a couple of charts that highlight why assets that can help diversify a portfolio and deliver strong returns irrespective of broader market conditions are so valuable today.

This is one of the factors driving investment demand for pink diamonds.

The first of these charts is presented below. It highlights the decline in the value of the US stock market, and the US bond market over the last year, not in dollar terms, but as a percentage of the economy, or GDP.

1-year drawdown of the total market cap of US equities + US Treasuries as a % of US GDP 

Chart of 1-year drawdown of the total market cap of US equities + US Treasuries as a % of US GDP 

Source: @CallumThomas, weekly chartstorm, @PhilipJagd.

As you can see, in the past twelve months, asset prices have declined by the better part of 50% of GDP. The size of the decline dwarves almost every other pullback in asset prices that we’ve seen in the last fifty years, with the exception of the Global Financial Crisis (GFC) some fifteen years ago.

There are three things, all of which are inter-linked in some way, that arguably make the current situation worse than what we saw during the GFC.

These are:

  • Inflation:

    When the GFC hit, inflation turned negative, meaning consumer prices were falling, if only for a short period of time. It then stayed low for years afterward. In 2022, inflation is at multi-decade highs in the United States, running at more than 8% per annum, with this problem seen across most of the developed world.

    This means that the real loss of purchasing power from this asset price correction is worse than what the chart above indicates, while from a confidence perspective, crashing asset prices and surging consumer prices is a double-whammy that will hold the economy back for some time.

  • Interest rates:

    When the GFC hit, central banks around the world, including in the United States, slashed interest rates to zero, as well as printed trillions of dollars to support the economy and financial markets.

    This time around, due to the inflation problem, central banks are hiking interest rates, and trying to soak up some of the money they’ve previously printed.

    Instead of supporting the economy, central banks are deliberately trying to hold it back, even though they know this could cause a combination of a possible recession, a spike in unemployment, and a further fall in asset values.

  • Equity market allocations could fall a lot lower:

    For most of this year, investor sentiment has been poor, as falling asset prices, higher inflation, higher interest rates and the war in the Ukraine made investors rightfully fearful on the outlook for asset prices.Despite the poor sentiment though, investor allocations to the share market remained relatively high, with no sign of a mass exodus out of the market.

    Therefore, in terms of what they were doing with their money, rather than just what they were saying about how they felt, investors were still positioned very aggressively.This has begun to change, but not by a meaningful amount as yet.

    This can be seen in the chart below, which shows both sentiment (blue line), which is near record lows, and investor allocations to equities (black line) which has now begun to fall, but is nowhere near the record lows we saw back in 2000 or 2008, which were proper market crashes.

Portfolio allocations vs surveyed sentiment

Chart of Portfolio allocations vs surveyed sentiment

Source: Topdown Charts, Refinitiv, ICI, AAII, II

Data on how much cash investors are sitting on is telling a similar story.

It’s risen this year, but not by an amount that suggests investors have in any way capitulated out of the share market.

Given this data, there is an obvious risk that investor allocations to equities could decline a lot further, as investors flee the poor returns, and high volatility, which will likely be exacerbated by the higher inflation and higher interest environment that we are now in.

Given their strong track record in periods of high inflation, diversification qualities, genuine scarcity, and market-leading performance over the last two years, we expect these trends to support pink diamond investment for some time.

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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