17 Mar

Pink diamonds. A recession proof investment!

It’s hard to believe that we are already half way through March of 2022.

The year has been a tumultuous one so far to say the least, with COVID continuing to pose challenges, including in China where it originated, with parts of the country again in lockdown as authorities try to minimise its spread.

Meanwhile, the terrible conflict in the Ukraine is rightly generating lots of attention and is the ‘front page news’ story of the year so far, with all of us hoping the bloodshed ends as soon as possible.

Financial markets and the economy have also gone into something of a tailspin in 2022, led by a booming oil price, which at one point this month traded at more than USD $130 per barrel.

Less than two years ago, in April of 2020, the oil price was negative. People were literally giving it away back then.

Today, the situation has completely changed, with the price increasing by circa 75% in the last twelve weeks alone.

Between rising risk of a recession, and heightened inflation risk, this oil price spike has many investors feeling like they have nowhere to hide.

We explore this below and highlight why pink diamonds are set to become the go to asset for astute investors.

Nowhere to hide

While it’s not all oil price driven, there is little doubt the recent price spike is worrying households and investors.

The latest set of official inflation figures in the United States shows headline inflation is now running at 7.9%, its highest level in decades, with more upside to come in the months ahead. In Australia, inflation expectations are now above 5%, their highest level since 2014.

Stories like this, which suggest we might be paying up to $7 for a cup of coffee in the morning will not help people’s anxiety, nor will paying $2 a litre for petrol.

It’s not just oil either that is contributing to inflation, with nearly all commodity prices soaring this year, including many agricultural commodities.

This is understandable when you consider how important both Russia and the Ukraine are in terms of wheat, barley and sunflower oil exports (see chart below), and the likelihood that the conflict there will severely limit supply for some time to come.

Top Wheat, Corn, Barley, and Sunflower Oil Exporters 2021

Top Wheat, Corn, Barley, and Sunflower Oil Exporters 2021 Chart

Source: USDA Foreign Agricultural Service.

The price spikes we are seeing are naturally causing investors and households to get more pessimistic on the outlook for the economy, with the most recent consumer sentiment survey in the United States hitting its lowest level in just over a decade.

Critically, sentiment has never been this low without the economy falling into a recession, which gives you some sense of how profound the challenges the global economy faces are right now.

Compounding the economic risk is the current state of play, and outlook for financial markets.

After all, when you look at what is happening to markets this year, it is not a pretty story. Some highlights, or in this case, lowlights, include:

  • US equity markets are now down almost 12%, their fourth worst start to year on record, while the tech heavy NASDAQ is down more than 20%, and officially in bear market territory.
  • Australian equities are also suffering, down 6.5% for the year.
  • Cryptocurrencies, which are often promoted as being uncorrelated to share markets, are faring even worse than the market itself, with Bitcoin now down by more than 40% since peaking in November 2021.
  • Cash in the bank is paying next to nothing, and indeed less than nothing once inflation is factored in.
  • Bonds, or fixed income assets, which are often sold as safe havens, are on track for one of if not their worst years ever, having fallen by almost 5%.

It’s worth reinforcing the point all this is happening in a world where inflation is running at multi decade highs. Factor that in, and even so-called safe havens like bonds have lost investors circa 13% of their wealth.

Equity market investors are also still at risk and may see a further plunge in the value of their holdings, with the S&P 500 on average falling by 25% in periods around recessions. This can be seen in the chart below.

Peak to trough S&P 500 decline around 12 recessions since WWII

Peak to trough S&P 500 decline around 12 recessions since WWII Chart

Source: Goldman Sachs Global Investment Research.

Clearly, financial markets do not like recessions.

Given the very real risk one is coming, it would be wise to consider how to position your portfolio now, so that it’s set up to protect and grow wealth in the difficult environment we all face going forward.

Diamonds the logical safe haven!

Sometimes, investment is about deduction.

If equities are overvalued (they are by historical standards), bonds and cash pay less than zero after inflation (they do), real estate is at record highs (which it is in Australia and many other parts of the world), then what is left?

The answer is of course commodities, or hard assets.

By a range of metrics, hard assets are almost certainly better value investments than the other options mentioned above. They also have a terrific track record of outperforming in higher inflation environments like the one we are in today, whereas most asset classes tend to decline.

And while pink diamonds might not be the only hard asset worth looking at, we think they do have a unique set of features that should make them one of, if not the best, performers in the years ahead. These features include;

  • Genuine scarcity: Pink diamonds have always been rare, with the 2020 closure of the Argyle Diamond Mine only reinforcing this scarcity.
  • Tangibility: Pink diamonds are one the few hard assets it’s practical for an investor to buy and physically hold. It’s not really possible to buy and store barrels of oil for example.
  • Capacity for specialisation: Provided you work with the experts, pink diamonds offer the capacity to specialise, giving you a chance to outperform the market, and earn even higher rates of return on your investment.

Combined, these are powerful tailwinds that are expected to push pink diamonds prices much higher in the years to come.

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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