Despite all of our wishes, it seems that the challenge posed by COVID-19 is still before us, with lockdowns in parts of Australia and limitations to freedom of movement coming back into effect this week.
Globally, whilst some countries have almost vaccinated their entire population, others, most notably India, are facing a crisis, with latest estimates suggesting up to 350,000 people a day are being diagnosed with the disease.
Given this backdrop, it seems entirely likely that the economic challenge posed by COVID-19 will continue for much, if not all, of this year, which will likely necessitate more government stimulus, more central bank money printing, and an even greater desire by investors to protect their wealth with hard assets.
In this week’s update, we look at various metrics by which investors, including clients of Australian Diamond Portfolio, may wish to compare two high profile hard assets: pink diamonds, and gold!
Pink Diamonds vs. Gold
When it comes to pink diamonds and gold, there are a range of characteristics by which both can be measured in their own right, and in comparison with each other.
Below, we list several of these characteristics.
As we make clear, whilst we are not anti-gold, we think pink diamonds offer a far greater chance of outperformance in the decade ahead, with their unique characteristics seeing soaring demand from astute investors worldwide.
Liquidity is the one characteristic where gold has an advantage over pink diamonds, with the precious metal typically turning over more than USD 100 billion per day. Investors that want to buy in or get out of gold can do so within 24 hours.
By contrast, pink diamonds typically take a few months to sell, which is why Australian Diamond Portfolio encourages clients to see pink diamonds as long-term strategic investments, and to make sure they keep enough money in more liquid investments.
Both pink diamonds and gold have performed well over the last fifteen plus years, but pink diamonds have come out ahead. This can be seen in the table below, which plots annualised returns since 2005, as well as the value of a $25k investment.
Pink diamonds, as we have long-explained, exhibit almost no price volatility, with years of stable returns interspersed with years of higher returns. During the GFC and the COVID-19 scare for example, pink diamond prices were stable, helping protect investor portfolios.
Gold on the other hand is actually more volatile than the share market, and like shares, can have major drawdowns. For example, between 2011 and 2015, the price fell by almost 50%, from a high above USD 1,900 an ounce, to a low near USD 1,050 an ounce.
10 years later, it is yet to fully recover those losses, as the chart below highlights.
USD Gold Price
Security risk and discretion
Both pink diamonds and gold can be stored at home or held in high security bank vaults. In practice though, many gold investors buy gold ETFs, or other investments where they don’t own gold directly, but rather a financial asset which tracks the gold price.
This introduces counterparty risk that pink diamonds do not suffer from.
It is also much easier to hold (and carry) significant levels of wealth in a pink diamond relative to gold bullion.
Gold is entirely homogenous. Therefore, even though it can be manufactured into different shapes and sizes, the return on gold will be the same for all investors who hold it for a given time period.
Pink diamonds on the other hand offer the potential for specialisation, with colour, shape, and other gemological factors all impacting the value of these unique stones.
Securing the best stones available on the market, for a given investment budget, lies at the heart of what we do for our clients at Australian Diamond Portfolio, giving them the opportunity to outperform based on the specialisation the pink diamond market offers.
Gold is scarce, with gold mines, which are located on every continent generating roughly 3,000 tonnes of production per year.
Pink diamonds are an order of magnitude more scarce, especially now that the Argyle Diamond Mine, which produced approximately 90% of the world’s pink diamonds, has closed.
Moving forward, this factor is likely to be more supportive of pink diamond prices than it is for gold.
What Happens Next
In our view, whilst gold does have some positive characteristics, we think the outlook for pink diamonds is superior, with multiple factors informing this opinion.
The factors obviously include the genuinely constrained supply, and supply outlook for pink diamonds, which will not change meaningfully in the decade ahead.
The capacity to specialise and outperform with pink diamonds in terms of the stones one purchases, as well as their lack of volatility, and the ability to discretely hold large amounts of value in these stones should lead to continued demand from astute investors in the years ahead.
All of these factors combined will support prices, with pink diamonds a good chance of continuing their outperformance relative to mainstream financial assets .
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.