05 Jun 2019

The Case for Diamonds Grows Stronger as ‘Bubble Gum’ Pink sells for A$11 Million

Bubblegum Pink Diamond

The aptly named the ‘Bubble Gum Pink’ diamond. A 3.43 carat internally flawless Fancy Vivid Purplish Pink, which sold for AU $11 million at Christie’s in Hong Kong this week.

The case for investing in rare coloured diamonds gets stronger by the week, with a much-anticipated interest rate cut delivered by the Reserve Bank of Australia (RBA) yesterday.

Markets were expecting the cut, so it didn’t come as a shock, and indeed the Australian dollar actually rose after the decision was announced, though we expect it’s just a matter of time before more currency weakness comes into play.

The RBA decision, which brings the cash rate to a new all-time record low of just 1.25%, likely won’t be the end of the stimulus measures we see from the RBA in the coming year.

The reason we think there are more rate cuts to come is as simple as it is troubling. The economy is getting worse.

For evidence of this, consider that earlier in the week, news reports highlighted the fact that advertisements for jobs were down more than 10% over the last 12 months.

Retail sales in Australia also fell during April, another bad sign, with the results particularly bad in NSW and Victoria, which is no great surprise given those are the two places house prices have been falling fastest over the last 12 months.

Speaking of the housing market, and despite the positive commentary about it after the Federal election, the picture continues to deteriorate. Up to 15% of homeowners in parts of the country are now in negative equity situations, where they owe more on their mortgage than their house is worth. Meanwhile house prices themselves were down 0.4% on a nationwide basis in May.

That decline in house prices isn’t as bad as the monthly falls seen over the last year or so, but they are still falls that equate to a loss of over 5% in a year.

No one wants to lose money, and for as long as these dynamics are at play in the housing market, investors are going to look for alternative options.

One of those alternatives is likely to be rare coloured diamonds, where rather than falling prices, investors will see record levels of demand for Argyle stones, as we mentioned in our market update on the 15th May.

Further evidence of the strength of the pink diamond market was seen this week with news that a 3.43 carat internally flawless Fancy Vivid Purplish Pink diamond, aptly named the ‘Bubble Gum Pink’, sold for AU $11 million at Christie’s in Hong Kong.

The price was nearly 30% above the original estimate Christie’s had for the stone, with sales results like these demonstrating the ongoing demand for rare pink diamonds, which shows no sign of stopping.

Back to the Australian economy, and the outlook is so troubled that JP Morgan Chief Economist Sally Auld recently stated that the RBA will cut interest rates four times in the year ahead. In an update to clients, she noted that:

“the structural headwinds facing the domestic economy — a deleveraging of household balance sheets, persistently low incomes growth, a recalibration of lending standards and a rebalancing of economic growth away from housing-related activity — all demand a long period of low rates.”

That long period of low rates that Auld refers to currently looks like it could last for up to two decades at a minimum. Imagine going 20 years where the income you earn on cash in a bank is only equal to, or in many cases less than the rate of inflation.

We are in little doubt that over such a time period, investors are going to be looking to move money out of cash and into assets like diamonds.

It’s worth pointing out that JP Morgan aren’t the only one with such a dire outlook for interest rates, with Westpac also recently downgrading their forecasts for the local economy.

They recently stated that we are likely to see three interest rate cuts before Christmas 2019, whilst also noting that “the option of QE would be on the radar screen for the RBA”.

QE is of course short for quantitative easing, which is a technical term for money printing. If Westpac are right, and at some point in 2020 Australia is printing money, then we will be following a dangerous path that was first embraced by America, Europe, the United Kingdom and the like during the worst of the Global Financial Crisis (GFC).

It is not good news, and it should be all the evidence local investors need in order to understand why they need to diversify and protect their wealth with tangible hard assets like rare coloured diamonds.

Share this