It’s hard to believe that it’s just over a month until Christmas is here, with this year seeming to absolutely fly by.
And while we are looking forward to winding down over the festive season, as I’m sure many of you are, it’s important to keep an eye on what’s happening in the markets and in the economy, to help set up our portfolios for success in 2023 and beyond.
To that end, in this week’s market update we look at the latest media attention that the pink diamond market is generating, which includes some commentary from myself in my role as the Executive Director at Australian Diamond Portfolio.
We also look at why genuinely scarce investments, which obviously include pink diamonds, are likely to continue to lead the way in terms of investment returns going forward, with the pendulum continuing to swing from speculative investments toward hard assets.
Australian Diamond Portfolio in the news
We were delighted to speak to The Australian late last week for an article looking at the coloured diamond market.
The discussion followed last week’s release of updated performance figures for our Australian Diamond Portfolio Pink Diamond Index (ADPPDI), with the article itself noting that the ADPPDI has shown pink diamond prices rising by more than 50% in the two years to the end of June.
The article, and our involvement in it, covered many factors that are relevant to investing in this unique asset class, with the following key takeaways from the article specifically, and other commentaries we’ve published in the past highlighting that:
- While pink diamonds tend to be the focus for coloured diamond investors, there are also red diamonds, which are even more rare, with the Argyle mine only producing around 60 carats of red and purplish red diamonds in its almost 40 year history.
- Prices for red diamonds have also soared, with a 1.21 carat fancy orange-red diamond selling recently for $2.7m in America even though the pre-auction estimate was only $225,000. In other words, strong buyer demand resulted in a sales price that was 12 times higher than the estimated market value.
- A robust secondary market will emerge in the coloured diamond market now that Argyle has closed, which means that the investment opportunity this asset class offers if far from over. Indeed, you can argue the investment rationale underpinning pink diamond investment is stronger than ever given the increasingly limited supply, and the broader market environment of higher inflation, volatile share markets and falling property prices.
- SMSF trustees are a major source of demand for coloured diamonds.
While high profile stones like the Williamson Pink Diamond that recently sold for over $100m will continue to dominate the headlines, coloured diamonds are a very accessible asset class, with investors able to access this market with budgets from $20,000 or above.
For those of you who would like to access the article in full, you can find a copy on our website at this link.
Hard assets will continue to lead the way
Up until the COVID-19 pandemic hit, commodity prices had spent the better part of a decade either stagnating at best, or falling, with the COVID crash seeing some commodity prices hit multi-decade lows.
These low and/or falling commodity prices were a major factor helping keep inflation rates around the world fairly low, with official consumer price indices barely rising by 2% per annum.
This low inflation in turn helped keep interest rates low for almost fifteen years, from the Global Financial Crisis through to the start of 2022.
These low rates and low inflation combined were a major factor behind both the multi-year rally in high growth technology stocks, from Apple, to Google, to Facebook and Netflix, and the relatively poor performance of many commodity producing companies.
The trend arguably culminated in late 2020, when oil producing behemoth Exxon was removed from the Dow Jones industrial index and replaced by Salesforce.
The switch between these companies perfectly captured the market’s fascination with all technology related investments, and its disinterest in hard assets.
Since then, it’s been almost all downhill for technology stocks, and all upside for commodity prices, and commodity producers, with the share price of Salesforce falling 43%, and the share price of Exxon rising by almost 220% in the last two years.
This can be seen in the chart below.
Total Returns since Exxon was removed from the Dow and Salesforce was added on 31 August, 2020.
Moving forward, we think that hard assets will continue to outperform the technology space, with a wave of layoffs hitting the latter sector, including:
- Twitter cutting 50% of its workforce.
- Facebook cutting 13% of its staff in its largest round of layoffs ever.
- Snap cutting 20% of its workforce.
- Shopify cutting 10% of its workforce.
- Netflix cutting 450 jobs in two rounds of layoffs.
- Microsoft cutting <1% of workforce.
- Salesforce cutting 1,000 jobs.
- Robinhood cutting 31% of its workforce.
- Tesla cutting 10% of its salaried workforce.
- Lyft cutting 13% of its workforce.
- Redfin cutting 13% of its workforce.
- Coinbase cutting 18% of its workforce.
- Stripe cutting 14% of its workforce.
Given the above, it’s clear that the era of high-tech outperformance is over.
Going forward, an environment of higher commodity prices means that companies involved in the production of said commodities will likely be in higher demand.
Those higher commodity prices also provide a structural underpinning for higher inflation, which is likely to stick around for the better part of ten years at a minimum.
This in turn will continue to encourage investors into actual hard assets, especially those that have a history of outperformance when inflation is high.
Pink diamonds continue to fit the bill well in this regard, with client activity at Australian Diamond Portfolio attesting to the strong demand being seen for this rare and most beautiful of asset classes.
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.