This week’s market update builds on recent publications, which have looked at how investors can use their superannuation to invest in pink diamonds, as well as recent rulings from regulators that, prima facie, make it easier for Australian investors to gain exposure to pink diamonds as an asset class.
We’d like to thank readers who have sent through feedback and/or questions – as it is clearly a topic of interest.
To that end, this week’s article focuses not so much on how local investors can buy pink diamonds, but rather why, with a look at some factors specific to Australia that are encouraging investors to include these assets in their portfolio.
The Australian case for pink diamonds
Australian investors have been adding pink diamonds to their portfolios in droves over the past decade, with Australian Diamond Portfolio witnessing this growth firsthand.
This growth has been driven by several factors, all of which have a certain Australian centric element to them. These factors include:
Diversification
Pink diamonds are trusted diversifiers in that they tend to behave independently from other assets that investors tend to have a large exposure to, such as the stock market.
And while the principle of diversification applies internationally, it’s particularly relevant for Australian investors given the local stock market is so heavily concentrated in banking / financial services as well as mining company and materials exposure.
These two sectors alone account for almost 50% of the value of the local stock market, as evidenced in the chart below.
By way of comparison, international equity markets tend to only have a 20-25% exposure to these sectors.
Given both financial services and materials can really suffer in an economic downturn, the need for local investors to diversify their portfolios with alternative assets is arguably even stronger Down Under than it is overseas.
This only strengthens the Australian investment case for owning pink diamonds.
Currency protection
All currencies lose their value over the long run, which is one of the factors that drives demand for hard assets like pink diamonds. In the short-term though, some currencies are more volatile than others, which makes them particularly risky.
The Australian dollar is one such currency, with periods of economic recession typically seeing the AUD tank. Two examples come from this article which highlights the fact that during the Global Financial Crisis in 2008 the AUD fell by 38% and in 2020 when COVID hit the AUD fell 18%.
The sharp decline seen when COVID hit is visible in the chart below, with pink diamonds adding much needed ballast to portfolios throughout this period.
AUD/USD Price Performance, 2017-2022
Source: The Capital.com platform.
Given this reality, more and more Australian investors have turned to pink diamonds in recent years, and continue to do so today, as they see an extra layer of protection built into these investments should the Australian dollar fall in a future period of crisis or uncertainty.
In addition to the above factors driving pink diamond demand, investors in Australia are also attracted to this market for more universal reasons including:
The scarce supply of these assets.
The genuine beauty and tangibility of pink diamonds.
The discrete nature of pink diamonds which allow them to be privately stored outside of the financial system.
The inflation protection pink diamonds offer.
The market leading returns which have seen pink diamond prices rise by more than 600% in the past fifteen to twenty years.
Markets move in cycles
In the above section, we discussed how pink diamonds can play an important diversification role for investors, given they tend to hold or even increase in value during periods of market turmoil, with Australian investors tending to also benefit from currency weakness in such periods.
While no one can 100% predict the future, we think that this protective element that pink diamonds can offer investors will become top of mind in the not-too-distant future, as markets globally look incredibly euphoric, as per the chart below.
Produced by @CallumThomas of Top-Down Charts, the euphoriameter is an index that, in essence, tracks greed or fear across the entire market.
The Euphoriameter
Combination of Forward PE, VIX, Bullish Sentiment
Source: Topdown Charts, LSEG.
As you can see, at present, the euphoriameter (pink line on chart) is near all-time highs.
That is likely a good thing if you are a seller, not a buyer of mainstream assets like shares today, for the chart also makes clear that on many prior occasions that the euphoriameter hit levels similar to where it sits today, markets went on to experience a major tumble.
Wealth protecting assets like pink diamonds came to the fore in those periods.
It wouldn’t shock to see something similar play out in the months ahead.
At the very least, investors should be prepared for it.
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.
The Australian case for pink diamonds
This week’s market update builds on recent publications, which have looked at how investors can use their superannuation to invest in pink diamonds, as well as recent rulings from regulators that, prima facie, make it easier for Australian investors to gain exposure to pink diamonds as an asset class.
We’d like to thank readers who have sent through feedback and/or questions – as it is clearly a topic of interest.
To that end, this week’s article focuses not so much on how local investors can buy pink diamonds, but rather why, with a look at some factors specific to Australia that are encouraging investors to include these assets in their portfolio.
The Australian case for pink diamonds
Australian investors have been adding pink diamonds to their portfolios in droves over the past decade, with Australian Diamond Portfolio witnessing this growth firsthand.
This growth has been driven by several factors, all of which have a certain Australian centric element to them. These factors include:
Diversification
Pink diamonds are trusted diversifiers in that they tend to behave independently from other assets that investors tend to have a large exposure to, such as the stock market.
And while the principle of diversification applies internationally, it’s particularly relevant for Australian investors given the local stock market is so heavily concentrated in banking / financial services as well as mining company and materials exposure.
These two sectors alone account for almost 50% of the value of the local stock market, as evidenced in the chart below.
By way of comparison, international equity markets tend to only have a 20-25% exposure to these sectors.
Given both financial services and materials can really suffer in an economic downturn, the need for local investors to diversify their portfolios with alternative assets is arguably even stronger Down Under than it is overseas.
This only strengthens the Australian investment case for owning pink diamonds.
Currency protection
All currencies lose their value over the long run, which is one of the factors that drives demand for hard assets like pink diamonds. In the short-term though, some currencies are more volatile than others, which makes them particularly risky.
The Australian dollar is one such currency, with periods of economic recession typically seeing the AUD tank. Two examples come from this article which highlights the fact that during the Global Financial Crisis in 2008 the AUD fell by 38% and in 2020 when COVID hit the AUD fell 18%.
The sharp decline seen when COVID hit is visible in the chart below, with pink diamonds adding much needed ballast to portfolios throughout this period.
AUD/USD Price Performance, 2017-2022
Source: The Capital.com platform.
Given this reality, more and more Australian investors have turned to pink diamonds in recent years, and continue to do so today, as they see an extra layer of protection built into these investments should the Australian dollar fall in a future period of crisis or uncertainty.
In addition to the above factors driving pink diamond demand, investors in Australia are also attracted to this market for more universal reasons including:
Markets move in cycles
In the above section, we discussed how pink diamonds can play an important diversification role for investors, given they tend to hold or even increase in value during periods of market turmoil, with Australian investors tending to also benefit from currency weakness in such periods.
While no one can 100% predict the future, we think that this protective element that pink diamonds can offer investors will become top of mind in the not-too-distant future, as markets globally look incredibly euphoric, as per the chart below.
Produced by @CallumThomas of Top-Down Charts, the euphoriameter is an index that, in essence, tracks greed or fear across the entire market.
The Euphoriameter
Combination of Forward PE, VIX, Bullish Sentiment
Source: Topdown Charts, LSEG.
As you can see, at present, the euphoriameter (pink line on chart) is near all-time highs.
That is likely a good thing if you are a seller, not a buyer of mainstream assets like shares today, for the chart also makes clear that on many prior occasions that the euphoriameter hit levels similar to where it sits today, markets went on to experience a major tumble.
Wealth protecting assets like pink diamonds came to the fore in those periods.
It wouldn’t shock to see something similar play out in the months ahead.
At the very least, investors should be prepared for it.
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.
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