01 May 2019

The Last Hurrah for Argyle!

Last week was another great reminder of why investors are turning to tangible safe haven assets like rare pink and blue diamonds.

In Australia, we saw the release of official inflation figures, which came in flat for the quarter, and up just 1.42% for the year, the lowest rate on record.

It led to two rapid outcomes, both of which are good for diamond investors.

  1. The Australian dollar fell rapidly, at one point falling below USD $0.70, and
  2. Odds of an interest rate cut by the Reserve Bank of Australia strengthened noticeably, with some analysts forecasting that the RBA will cut rates when they next meet in early May.

An interest rate cut, when it comes, is unlikely to be a one-off, as the following chart from the ASX indicates.

The chart, for those who’ve not seen it before, plots current market expectations for interest rates all the way out to September of 2020, with the purple columns highlighting where the market thinks rates will be on a month by month basis between now and then.

As you can see, at present, the market is forecasting rates will be below 1.25% by July 2019, indicating one interest rate cut within the next three months. By February 2020, rates will be below 1% based on current market pricing.

Whilst lower interest rates might be good news for homeowners or property investors with big mortgages, they are a disaster for those living on their savings, who are all going to get a pay cut in the coming months if rates decline from their already record lows.

Quite naturally, this will lead to two outcomes:

  1. With less disposable income coming in, these savers will cut back their discretionary spending.
  2. They’ll look for investment alternatives to low yielding cash, of which rare coloured diamonds will be one.

What happens after RBA rate cuts?

The prospect of a cut in the cash rate from an already record low 1.5% would understandably disappoint savers.

Unfortunately – it’s something they are going to have to get used too. Bond yields are telling us that rates will remain low for up to 15 years minimum from here, something that will support demand for rare coloured diamonds over that time period given savers will be punished if they keep their wealth in cash.

If low rates until the middle of the 2030’s weren’t enough, some economists are now also calling for ‘helicopter money’, where the RBA would print money to give to citizens.

That’s the view of Citibank’s Australian economics and interest rate strategy team who think helicopter money “deserves serious consideration by the RBA”.

Whilst this is happening in Australia, Americans are also busy coming up with new ways to devalue the money you earn and keep in your bank account.

An article in Bloomberg suggests the Federal Reserve should introduce money that “rusts”, i.e. make the currency that we earn lose value unless it’s spent in a timely manner.

The “logic” of this proposal is that by punishing the saving of money (because it will lose value if it’s not spent) savers will be encourage to consume more goods and services, which will benefit the economy.

As you can probably tell, we are sceptical of the likelihood these things will succeed without negative unintended consequences.

Irrespective of that though, the key takeaway for Australian Diamond Portfolio clients when reading articles about helicopter money or money that “rusts”, is that the only way to preserve and grow wealth in the coming years will be through the ownership of tangible assets.

Argyle – The Last Hurrah!

The Argyle Mine was in the news this week, with an announcement that a 28.84 carat white diamond, named Argyle Octavia, was unearthed last month.

Set to be sold via tender in Antwerp later this year, the diamond is indeed rare, with gem-quality white diamonds greater than 20 carats making up just 0.000007% of Argyle production since 1983.

Image © Rio Tinto 2019

It’s a wonderful find, and whilst the Argyle mine is obviously still capable of producing such stones, this news does not change the key message for investors when it comes to the mine, and the investment case for rare pink diamonds.

Supply is almost exhausted, and the mine is set to close by 2021. In many ways, the Octavia may end up being the last hurrah for the Argyle Mine, something acknowledged by Rio Tinto themselves when discussing the find, with Arnaud Soirat, the Copper and Diamonds Chief stating that “We are delighted with this discovery which is a testament to the extraordinary Argyle orebody that continues to deliver these miracles of nature, even as it nears the end of mine life.”

The pending closure of the mine, coupled with the strong demand outlook, will manifest itself in higher prices over time.

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