22 Apr

The Importance of Specialisation

Stock markets have remained relatively calm over the last week, with the spread of coronavirus continuing to slow, and some countries beginning to talk about easing restrictions on human movement in the foreseeable future.

This includes Australia, where the government have suggested that some services, including elective surgeries, will be allowed again, with the ban on these set to be lifted after the ANZAC day long weekend.

Whilst we welcome any and all signs that life is heading back to normal, we’d note that from a health perspective, and from a financial perspective in particular, we are far from out of the woods, with investors likely to face continued uncertainty for the foreseeable future.

If you need any further evidence of how far out of whack things are in the real economy right now, consider that this week, the price of oil fell below zero. We don’t wish to sound alarmist, but we can’t but help think we face some very difficult years ahead of us if oil, the most important commodity powering the industrialised economy is literally worthless.

Make no mistake, there will not be a quick return to normality from the economic damage caused by coronavirus, with the economy likely to get substantially worse in the coming months. Central banks can try and print our way out of this crisis (and they are trying, as you can see in the chart below which plots the exploding rate of money printing), but it will not work.


12m rolling change in G10 Central Banks’ Balance Sheet (USD billions)

12m rolling change in G10 Central Banks' Balance Sheet (USD billions)

Sources: Deutsche Bank, Bloomberg Finance L.P, Datastream.

Instead, what all of this currency printing will do is encourage investors to put their money into hard assets, which will be a tailwind for unique asset classes like pink diamonds for years to come.

The importance of specialisation

With the economy and financial markets going through a period of unprecedented volatility, it should be no surprise that some luxury items are struggling to find the same level of buyers, with people closing their wallets.

Pink diamonds have of course been totally unaffected by this sell off, with prices slightly rising in the last year in USD terms, and up significantly in AUD terms.

So strong is the expected demand for pink diamonds in the years ahead that there are rumours Rio Tinto are looking to sell the Argyle name once the mine has closed.

The fact that this is on the table is another sign of the enduring value of the Argyle brand itself, and of the pink diamonds that have been sourced from the Argyle Diamond Mine. The diamonds will only get more valuable in the years to come.

The strong relative outperformance of pink diamonds relative to the broader diamond market in the last year (and indeed for many years prior to it) as well as the genuinely scarce nature of pink diamonds is exactly why we encourage our clients at Australian Diamond Portfolio to specialise, focusing on pink diamonds for their investment portfolio.

Not only are these diamonds safer investments relative to the broader diamond market, but they will also likely offer more significant upside potential in the years to come, as more and more investors gravitate to this unique asset class.

Demand for diamonds will continue to grow

As we mentioned earlier in this article, central banks are undertaking unprecedented interventions in the economy and in financial markets. Whilst this soothes some investors in the short-term, bigger picture thinkers know the risks that are building, and are instead looking at alternative assets, knowing that they will offer a safer way to protect and grow capital in the years ahead.

To that end, this week we came across a great article in Advisor Perspectives, written by a gentleman named Bob Rodriguez, a multi award-winning fund manager and market professional with over 30 years’ experience.

Rodriguez notes that recent interventions by central banks represent “the end of capital markets as we have known them.” He goes on to say (bolded emphasis ours), “There is now absolutely no accurate pricing discovery in the capital markets, and we have entered a period of total manipulation. In light of this, the only markets I have an interest in are those where the heavy hand of government is not involved or only minimally involved. This leads me to rare commodities and collectibles. The public equity and debt markets are now nothing more than greater fool markets that are led by the greatest fools of all, the Fed and the Congress.”

We think investors should take note when highly successful fund managers who have made their careers in financial markets state that they are turning their back on stocks and bonds.

We also think they should take note when those same highly successful fund managers are saying they are turning their attention to assets like commodities and collectibles.

We are certain that in the years ahead, Mr. Rodriguez will be joined by many other financial luminaries, all of whom appreciate the need to protect and grow wealth through investment in tangible assets.

Given no other tangible asset class has the uniquely profitable supply/demand profile that pink diamonds offer, we are certain that a meaningful portion of this demand will flow into pink diamonds, boosting prices in the decade ahead.

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.


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