17 Mar

Stimulating pink diamond prices

It’s been another interesting week in financial markets, as technology stocks, Bitcoin, and bond markets all bounce around. We are also seeing some worrying signs in terms of a re-emergence of COVID-19, whilst hiccups in the vaccination rollout plan in Australia suggest it may take a little longer than anticipated before things return to normal.

In our latest update below, we look at recent news regarding the US $1.9 trillion stimulus program announced by Washington, and why this stimulus, combined with rising inflation expectations, suggests we will see much higher pink diamond prices in the years ahead.

Stimulus for everyone

One of the biggest economic developments of the last few weeks has been the announcement of the USD $1.9 trillion economic stimulus package from the Biden Administration in the United States.

For a population of just under 330 million people, the package works out at just under $6,000 for each and every American citizen, and involved a range of measures, including;

  • Direct payments of up to $1,400 to most Americans.
  • $300 per week unemployment insurance boost until September this year.
  • Child tax credits.
  • $25-$30 billion in rental assistance.
  • A 15% increase in food stamp benefits.

Whilst this stimulus package will provide welcome relief for millions of Americans, markets themselves are instead looking ahead at an arguable more important initiative, which is Biden’s plan to unleash an infrastructure stimulus plan that will cost anywhere between USD $2 and USD $4 trillion over the next decade.

Bear in mind this infrastructure stimulus package is being proposed in a country that is already running a deficit of up to 15% of GDP, a number that is absolutely unprecedented in the last 70 years (see chart below).


Federal Surplus of Deficit as Percent of Gross Domestic Product

Chart of Federal Surplus of Deficit as Percent of Gross Domestic Product

Sources: OMB, St. Louis Fed.

Whilst there is no doubt the US economy could do with some revitalised infrastructure, and there will be some economic benefits that accrue from an initiative of this nature, there are only two ways for this package to be funded.

Taxes on company earnings will need to rise (a research note from Goldman Sachs suggests up to USD $1 trillion in higher taxes may be on the way), or the Federal Reserve will need to continue to print money.

In reality, it will likely be a combination of the two, with this scenario boding very well for pink diamond prices in the decade ahead.

Pink diamonds set to benefit

The stimulus plans being enacted in Washington now, and the infrastructure package that is being put in place will help support hard assets, including pink diamond prices for a few key reasons.

The most obvious of these reasons is that it will lead to higher overall inflation across the economy as a whole.

This is already being seen in the markets, with the chart below showing inflation expectations, which have soared since March last year, and are now at their highest level in over a decade.


5-Year Breakeven Inflation Rate

Chart of 5-Year Breakeven Inflation Rate

Source: Federal Reserve Bank of St. Louis.

All that stimulus creates greater demand for raw inputs, particularly infrastructure related spending. That can’t help but equal higher prices, especially when supplies of certain commodities are constrained at present, with no easy way to expand supply given the political and environmental concerns that often accompany large scale mining expansion.

Therefore, whilst Washington won’t be buying pink diamonds directly, their stimulus packages will help support prices for commodities as a whole, which provide a tailwind for the pink diamond market.

Added to that is the ability for pink diamonds to act as an effective diversifier, and a great way to store wealth when other markets are volatile.

The fact taxes on company earnings are likely to increase is problematic enough for big corporations, but rising inflation hurts them too, as it will feed through to higher input costs for those companies, the most obvious of which is wages.

In turn, this can act to drag down company earnings, and therefore share prices.

Indeed, according to the chart below, equity market returns in environments of high inflation have been terrible in the past, with the blue line representing changes in equity values during periods of higher inflation, like the one we are heading into now.


Equity Returns are radically different in different CPI environments
US S&P 500 Comp under different inflation/disinflation environments

Equity Returns are radically different in different CPI environments

Source: Gavekal Research/Bloomberg, Shiller data.

As you can see, in the past, periods of high inflation have seen equities return nothing at all, with the creators of the chart noting that; “During inflationary periods, shares returned the same as cash, but with far higher volatility. To put it simply, shares are no inflation hedge.”

So, if cash in the bank is paying zero, bonds return less than inflation (which is rising), and shares aren’t a hedge against that inflation – then where do investors turn?

The answer clearly is hard assets, and of all the hard assets, none are more supply constrained, and more desirable as a store of wealth than pink diamonds.

These trends will take the better part of a decade to play out at a minimum, but make no mistake, we face years of rising inflation rates and of mega government stimulus packages.

Given this backdrop, we could not be more bullish on the outlook for pink diamonds.

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.


Share this