It’s been another interesting week in financial markets, with the biggest news in Australia being the bungled attempts by the Federal Government to secure a reliable supply of COVID-19 vaccinations.
The situation has become so dire that the major vaccine we were planning on using, produced by AstraZeneca, is now no longer going to be used in most cases for people under 50, whilst according to some reports, doctors are refusing to administer it given their concerns about potential legal liabilities.
Whilst we appreciate the politics around COVID-19 itself, and the vaccine rollout are contentious, they are worth mentioning in the context of their financial market impact, as this is relevant for all investors, including clients at Australian Diamond Portfolio.
To that end, the challenges Australia is facing on the vaccine front are beginning to show up in foreign exchange markets, with the Australian dollar beginning to weaken versus the USD in the last few weeks.
After topping out at USD 0.797 in late February, the AUD has fallen just over 4%, and closed last week at USD 0.761.
Whilst that is by no means a large fall, it could well be a sign of things to come, with the local currency at risk of a more meaningful pullback in the months ahead.
It’s worth remembering of course that in March last year, the AUD was only trading at USD 0.557, with the local currency almost 40% higher than it was just over a year ago, with recent moves in the FX rate seen in the chart below.
AUD vs. USD FX Rate
That strength in the AUD, which is unlikely to persist, is one of the reasons clients at Australian Diamond Portfolio are busy adding to or beginning their diamond portfolios now.
Not only do they want to secure a highly prized pink diamond, the supply of which is continuing to dwindle given the closure of the Argyle Diamond Mine, but they also want to do so before the AUD potentially falls. This is something we’ll explore in more detail as the year progresses.
In this week’s update, we continue with our recently launched Pink Diamond Investment Series by looking at pink diamonds, and comparing them to residential property, an investment that is always top of mind in Australia.
Pink Diamonds vs. Property
According to local folklore, the Great Australian Dream has always been to own your own property, with this national ethos perhaps best summed up in the classic Australian film, The Castle.
Whilst there are some wonderful advantages to owning your own home, there are also some drawbacks, the most notable of which is the extreme price you now need to pay to get a foot on the property ladder.
This is seeing young Australians in particular taking on eye watering amounts of mortgage debt to buy a property, with an incredibly clear correlation between rising prices and rising debt levels, and ever lower interest rates a key driver of this phenomenon.
Housing Prices and Household Debt*
Ratio of household disposable income
Below, we look at the merits of investing in pink diamonds vs property, both of which are real assets, based on a handful of metrics that are important for investors to consider.
Over the last 15 years, pink diamonds have easily outperformed Australian real estate, with the former delivering returns of approximately 10%-12% per annum, depending which type of pink diamond an investor has held.
This can be seen in the table below, which also shows the value of a $25k investment into pink diamonds since 2005.
Property on the other hand has risen by just 7%, though of course some states and regions will have done better than this, while other areas (for example mining towns) will have done far worse.
Pink diamonds can typically be bought outright, with most investors not needing to borrow money in order to access the market. This is very different to property, which typically involves an investor having to borrow 80% or more of the property value in order to make the investment.
The leverage needed in property can magnify gains if you are fortunate enough to buy a house, or unit or apartment that goes up in value, but it also means much smaller percentage declines in value can totally wipe out your investment.
That makes it an additional risk factor.
Most people don’t think about this when they think of buying property, but maintenance and running costs are a major factor that chip away at the real returns you make on a property, as well as consume a lot of time.
Electricity bills, water bills, council rates, house and contents insurance, time spent mowing the lawn and fixing the air-conditioning when it breaks down. All of that adds up.
By contrast, a pink diamond has no ongoing maintenance, and can be stored for a very modest cost in a high security vault.
A final factor worth considering is the outlook for these asset classes in the decade ahead, which involves an assessment of risk and opportunity.
On this score, pink diamonds almost certainty come out ahead. Firstly, they are genuinely supply constrained, a factor that is more relevant than ever given the closure of the Argyle Diamond Mine. Secondly, their demand, which is rising, comes from investors all around the globe.
Australian property on the other hand, is seeing key segments of the market (international students and investors) pullback from the market, with this trend likely to be in place for years.
The only factor pushing it higher is the record low interest rates from the RBA, which has fed through to our big banks engaging in a price war to funnel as much mortgage debt as possible out into the economy.
This will “work” (as in help push up prices) in the short-term, but it’s a dead end street, with rates already below zero once inflation is factored in, whilst their will come a debt saturation point, at which point households just say no to more borrowing, irrespective of how low interest rates fall.
Given the correlation between debt levels and prices, when that debt saturation point hits, house prices are at risk of a significant fall, which will take years to recover from, if we are lucky.
As you can see, whilst there is definitely nothing wrong with investing in property, it is not without risk, whilst the outlook for capital price appreciation in the years ahead suggests it is pink diamonds that will continue to outperform, like they have for much of the past 15 years.
Pink Diamonds in the news
Auction house Christie’s was in the news in early April, with media coverage of a plan to sell a 15.81 carat Fancy Vivid Purple Pink diamond, known as “The Sakura Diamond”, on May 23. Estimate suggest the stone could fetch up to USD $38 million under the hammer.
Whilst it is high-profile pink diamonds such as “The Sakura Diamond” that dominate the news, high quality pink diamonds that will offer even more upside in terms of investment returns are accessible by a wider range of investors.
It’s important to note that the best estimates suggest less than 10% of pink diamonds weigh more than 0.20 carats, with most clients at Australian Diamond Portfolio investing between AUD $50,000 to AUD $150,000 when buying into this unique asset class.
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.