08 Jul

Pink Diamonds to Benefit as Investment Capital Migrates

It seems that despite all of our hopes, a return to normal in our daily lives and in the economy is some time away, with the spread of COVID-19 accelerating in many parts of the world, including in the United States, the largest economy in the world.

Australia is clearly not immune, with the decision to shut down large parts of Melbourne for the next six weeks, and the closure of the NSW/Victoria border a stark illustration of the challenge we face to manage, let alone control this virus.

The impact on the economy, which was already on its knees, will be severe, with the depth of the recession we are in only likely to worsen in the months to come.

As a sign of the building stresses, consider the following:

  • Consumer confidence figures fell to an 8-week low last week, with current readings in line with where they were during the Global Financial Crisis. Households are particularly uncertain regarding when it comes to buying major household items.
  • Plans to bring tens of thousands of international students back into Australia are likely to be scrapped, as the public health risk is deemed to be too high. This will impact the education sector, as well as the housing market and hospitality industry.

  • Early superannuation withdrawals are now approaching AUD $20 billion, as financially stretched households tap into their retirement savings.
  • Thousands of restaurants are expected to shut in the coming months, as restrictions on diner numbers mean customers would need to spend upwards of $300 per head to keep restaurants profitable.
  • Hidden unemployment is surging, as Australians give up looking for work. There has been a 50% increase in the number of Australians who are unemployed but not actively looking for work, with this number now approaching 8% of the workforce. Most estimates suggest the real unemployment rate is closer to 20% today.
  • The big banks in Australia are extending their mortgage deferral plans by another four months, to avoid a ‘mortgage cliff’ causing a crash in the Australian property market. The latest statistics suggest over 500,000 mortgages, with a combined value of over AUD $175 billion have already been deferred.

This can be seen in the chart below which shows total deferred loans in Australia, including business loans, with almost AUD $250 billion of loans on the books of Australian banks that are essentially non-performing.

Total $ worth loans deferred

Total $ worth loans deferred.

Source: Australian Bankers Association

There are also reports of households again stockpiling essential items, with images of empty supermarket shelves again doing the rounds on social media.

Alarming as these developments are, it’s how we react to them that is important going forward. From an investment perspective, one can’t help but think this crisis is accelerating the trend toward investing in real assets like pink diamonds, which offer greater security and return potential – factors which are more important than ever.

Impact on Asset Markets

Some investors might ask why we remain so confident in the outlook for pink diamonds. The answer is that there are multiple factors that drive our bullish outlook, including:

  • Price history: Pink diamonds have returned over 10% per annum over the last 15 years. They have a demonstrated track record of delivering, irrespective of broader market conditions. This continues to give investors confidence in this unique asset class.
  • Tangibility: Pink diamonds are physical assets you can touch and feel. They are not merely paper representations of wealth. In more troubled times, investors tend to pay a premium for wealth you can hold in your hands.
  • Limited supply. Unlike paper currency, stocks and bonds, pink diamonds are genuinely rare, with the supply limitations only exacerbated by the pending closure of the Argyle  Mine later this year. The combination of rising demand and limited supply will push up the price of any asset, and there is no reason to think pink diamonds will be any different in this regard.

Part of our optimistic outlook for pink diamonds is also driven by our negative outlook for traditional assets.

This will be something we explore in detail in upcoming articles, but suffice to say that the outlook for the next 10 years for traditional asset classes (stocks, bonds, cash and property) is incredibly troubled.

At best returns are likely to be a fraction of those that investors have gotten used to over the past few decades, though it wouldn’t surprise if they were outright negative.

Money has to go somewhere, so investors can’t just move money away from stocks, or out of the cash in the bank, they also have to move it toward something.

Pink diamonds are one such asset class that will benefit and benefit greatly from this migration of investment capital.

EOFY Report Coming

By the end of July, we aim to publish our detailed end of financial year report, which looks at developments in the economy, in financial markets, and of course in the pink diamond market.

Look out for it in your inbox, and if there is anything the team at Australian Diamond Portfolio can do to assist when it comes to building a pink diamond portfolio, or investing in your first pink diamond, don’t hesitate to get in touch.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and look forward to any questions or comments you may have.


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