04 Mar

The opiate of high pink diamond prices!

It’s hard to believe we are already into the third month of 2021, with the continued uncertainty and short lockdowns from COVID-19 making many people feel like last year never really ended.

Despite the two steps forward one step back feel approach, as individuals, business people, workers and investors, we can feel more confident that we are heading in the right direction on the COVID-19 front.

For despite a couple of hiccups, vaccinations are beginning to roll out in Australia, whilst in the Unites States, hospitalisations, confirmed cases, and the number of people dying from the virus have all thankfully dropped dramatically in the last few weeks.

Given this backdrop, it pays to turn our attention to what a ‘post COVID-19’ world looks like from an investment perspective.

And when one does that, it is clear that the challenge to protect and grow wealth using traditional assets in the decade ahead remains profound, which is one of the reasons we remain so bullish on pink diamonds.

The curse of low interest rates

In mid-February, the AFR ran an article with the URL “the opiate of low interest rates”. Titled; “Cheap money addiction will be hard to shake” the article was authored by Satyajit Das, a well-respected former banker and author.

Headline from Financial Review reading 'Cheap money addiction will be hard to shake'.

Pink diamonds are the opiate

Given this background or ever lower ever interest rates and more money printing, there are a handful of truths that we think will become more evident to investors looking to protect and grow wealth in the years ahead. These include;

  • Cash is dead.The good old days of being able to safely tuck your money away in a bank and live off the interest are gone, and they aren’t coming back. The market is currently telling us we will have negative real interest rates (i.e. after inflation) for up to 30 years. To grow wealth, we will all need to do something with our money.
  • Bonds might be worse.At least cash in the bank is steady on a day to day basis. Bonds, which are supposed to be safe havens, are no longer necessarily that, with the bond market in February having its worst sell off since the early 1990s. In Australian and the US, some bond yields rose (which means prices fell), by upwards of 40%.
  • Diversification might not work like it used to.The standard approach to investing says invest your money in the stock market, the bond market, property and cash. But what do you do when the stock and property markets are at or near all-time highs, and cash and bonds are now dead-end investments?Diversification still makes sense, but we now need to think more broadly about how to diversify.
  • Hard assets are the key:Of all the solutions to the challenge investors face, hard assets are likely to be the most appealing. They are by nature limited in supply, which brings in built inflation protection.

But which ones to invest in?

From our perspective, pink diamonds make the most compelling case. After all, they are;

  • Truly scare, with the closure of the Argyle Diamond Mine last year adding an extra degree of scarcity to pink diamonds. In this they are unlike other commodities like oil, iron, ore, copper or wheat, of which thousands of tonnes or barrels are produced and consumed each year.
  • Stable, with pink diamond prices exhibiting minimal volatility on a year to year basis, unlike other commodities which are typically more volatile than the stock market itself.
  • Better performers, with pink diamonds prices up more than 10% per annum over the last 15 years, whilst broader commodity prices have crashed since the Global Financial Crisis hit.
  • Discrete and easy to store, with pink diamonds able to be purchased and stored in private vaults, something that can’t be done for many other commodities.

For all of these reasons, we see pink diamonds as an opiate to the challenges posed by ultra-low interest rates and expect to see this reflected in much higher prices for this truly unique asset class in the coming decade.

Commodities like oil and copper are notoriously volatile, and subject to huge expansions in supply at times. Plus, where and how can you store it?

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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