This week has seen some welcome relief on the COVID-19 front, with the short lockdown in Victoria coming to an end, and a vaccine rollout commencing in Australia.
Hopefully the worst is behind us, and we can all get back to business, and more importantly, life as usual, mingling freely with our colleagues, friends, family and loved ones.
In this week’s market update we look at a report from Goldman Sachs on the potential for a huge boom in commodity prices, which would be ultra-bullish for pink diamonds.
We also share some thoughts on the Australian dollar, and why a large decline in the years ahead may be on the cards, using history as a guide.
If that were to happen, it would be great for the pink diamonds our clients at Australian Diamond Portfolio have already invested in or are looking to purchase in the period ahead.
The pink diamond super-cycle
In late 2020, one of the most high-profile firms on Wall Street, Goldman Sachs, announced that in their view, the world is embarking on a new commodities super-cycle.
Super-cycles are impossible to define but can best be thought of as a decade long period at minimum, where the asset class in question experiences price growth that is significantly greater than long-term averages.
The last super-cycle for commodities kicked off around the turn of the century and ran for several years right up until the Global Financial Crisis hit. Over that time period, the Bloomberg Commodities (BCOM) Index rose by more than 200%, with some commodities like Copper, arguably the most important of all the industrial metals, rising by a factor of five.
From the peak of the commodities cycle more than a decade or so ago, right up until March last year, it has been all downhill, with the BCOM Index falling by almost 75%, and returning to levels last seen in the 1990s.
All this can be seen in the chart below, with the market beginning to rise again in the last nine months of 2020, and the first few weeks of 2021.
Bloomberg Commodities Index – 1965 to 2020
Goldman Sachs seem to believe that the recent increase is just the beginning, and that we are at “the beginning of a much longer structural bull market for commodities”, with the bank also noting that when looking at the current set up in commodity markets, they “believe that similar structural forces to those which drove commodities in the 2000s could be at play,” and that Goldman’s super-cycle view is driven by a range of factors, including:
- An expected pick-up in economic output now that the worst of the COVID-19 induced lockdowns appear to be behind us.
- The likelihood developed market economies will invest in future growth with an emphasis on a green industrial revolution.
- The increased focus on social need, and prioritisation of support for lower income households, which should be bullish for commodities given these households tend to spend more of the extra money they receive.
Indeed this last point is of particular relevance, with Goldman’s stating that social policy developments in the aftermath of COVID-19 are similar to the “War on Poverty” campaign launched in the United States in the 1960s, with the bank going on to note that they; “believe a better analogue to the current environment is the super cycle of the 1970s rather than the 2000s.”
On top of the points Goldman’s have raised, you also have the fact that the ten plus year bear market in commodities that ended in 2020 led to a dire shortage of capital investment in the space.
By definition this helps create a major lag time between economies wanting and needing more commodity inputs, and companies actually being able to supply them.
The record divergence between stock prices (all-time highs) and commodity index levels (crashed to decade plus lows) leading into 2020, which are bound to revert toward longer-term averages, plus the potential for continued weakness in the USD also bode well for commodity prices in the decade ahead.
The potential for this commodity super-cycle to come to fruition over the next decade is incredibly bullish for pink diamonds, which more than doubled in price last time commodity markets soared.
Given this background, not only is it likely that pink diamonds will benefit from a broader commodity bull market, but they will also benefit as an inflation hedge, given rising commodity prices can be expected to push up consumer price inflation too.
From an investment perspective, it is also important to remember that pink diamonds offer a handful of unique investment properties that help them stand out relative to other commodities. These include;
- Price stability: Whilst commodities might be in a super-cycle, prices will be very volatile along the way. Pink diamond prices on the other hand are insulated from this volatility, offering a smoother return path for investors.
- Genuine scarcity: Whilst all commodities are scarce, not all are genuinely rare, with no other commodity impacted last year like the pink diamond market was, with the closure of the Argyle Mine reducing annual new coloured diamond production by approximately 90%.
For these reasons, we expect a commodity super-cycle will be particularly rewarding for pink diamond investors.
Falling AUD to boost returns
For Australian investors, we are even more optimistic about the decade ahead.
This is because we not only expect to see large increases in the USD price of pink diamonds, but also believe there is significant potential for a large fall in the value of the AUD. This will boost the returns Australian investors, including our clients at Australian Diamond Portfolio, will generate.
This is a particularly relevant point given the AUD has actually increased by 40% since March 2020 and is now trading back at its highest level in years.
In the 1970s, which is the time period Goldman’s think most closely reflects the environment we now face, the AUD also appreciated at first. Starting at about USD $1.10, the currency went on to increase by about 35% between 1970 and late 1974, at one point climbing as high as USD $1.48.
For the remainder of the decade though, the local currency fell sharply, losing more than 30% of its value in the space of a few years, with the price bottoming out just above USD $1.00 in late 1976.
These moves can be seen in the chart below, which plots the AUDUSD FX rate over that period.
AUDUSD Foreign Exchange Rate – 1969 to 1980
If something similar were to happen again, the impact on pink diamond prices for Australian investors would be profound, with the ability to take advantage of the current strength in the AUD another key factor motivating astute investors to acquire pink diamonds today.
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.