24 Nov

The price of perfection

We’ve often stated that pink diamonds are like a piece of art, crafted by nature over millions of years.

We were reminded of that when we came across a recent article in The Sunday Times. Provocatively titled, “Red diamonds are not forever”, the article discussed the majestic beauty of these truly rare assets, with one jewellery connoisseur noting that valuing pink diamonds was like pricing, or valuing a piece of art.

The article also noted how pink diamonds have outperformed many stock markets over time, and how resilient they are in the face of adversity, with one commentator noting that when it comes to assets like cars, wines, paintings or pink diamonds, if you “buy the best of the best there will always be customers for that, regardless of recessions.”

We couldn’t agree more, with the long-term case for pink diamonds looking as safe, as strong, and as important as ever as we head toward the festive season and another new year.

On that note, it is incredible to think that in just over a month, we will be celebrating Christmas and calling time on calendar year 2023.

And while I think we can all look forward to the holidays, this time of year is also the perfect time to reflect on the year that was, and what the year ahead may look like.

In the pink diamond world, we would argue that there have been three or four key themes that have come to the fore throughout this year.

  • Continued strong performance, with prices climbing across all categories of pink diamonds in 2023, even if the speed of that growth has eased from the breakneck price increases we saw in the two years after the Argyle mine closed in late 2020.
  • A more subdued market from the perspective of media attention and general focus on pink diamonds. We put this down to several factors, including the broader news and investment cycle, which has been dominated by stories of high inflation, seemingly never-ending increases in interest rates, a huge bounce in the property market, and a very good year for the share-market, even as broader economic conditions continue deteriorate.
  • Weaker liquidity, whereby turnover in the pink diamond market is more subdued than it has been in the past three years, even if prices remain strong, as per our first point.

To a large degree, there is crossover between these points.

The lack of media attention for pink diamonds (relative to the period when the Argyle mine closed), together with more restrictive financial conditions (given higher mortgage and overall inflation rates), has no doubt impacted some of the urgency investors may have otherwise felt.

That said, the fact that pink diamonds have performed as well as they have in 2023 bodes very well for the future, as a handful of factors line up to suggest the coming years will be very favourable for this boutique asset class.

The next catalyst for pink diamonds

As we head into 2024, market strategists covering all kinds of asset classes are busy making predictions about what the year ahead will bring.

And while we don’t pretend to be an expert on the share market or other asset classes, we feel that there are catalysts brewing which will be very positive for pink diamond demand, and pink diamond prices.

The first of these pertains to interest rates, with the chart below showing what the market currently expects will happen to rates between now and November 2025. As clear as day, the expectation is that rates are going to come down, and substantially at that.

Market Expectations for Fed Funds Rate
(Data via Fed Funds Futures, Nov 2023 – Nov 2025)

Sources: Creative Planning, @CharlieBilello

That is likely bullish for pink diamonds for two key reasons.

The first of these reasons is that lower interest rates mean lower returns on savings for those keeping money in the bank. This is especially true once inflation is factored in, with rises in consumer prices still likely to be a factor, or a known risk that investors will have to navigate in the years ahead.

All else being equal, these lower rates are likely to be really positive for hard assets like pink diamonds, which tend to act as a hedge against inflation, and thrive in periods that interest rates are low and/or falling.

Secondly, market history seems to suggest that periods in which interest rates are cut are often very bad for traditional asset prices like the share market. This is contrary to popular opinion, and much market commentary today, which seems to think that the prospect of interest rate cuts will force the market higher in 2024.

While that could happen, it would go against the grain of history. This can be seen in the chart below, which shows the performance of the US equity market over the almost twenty plus year period between the late 1990s and 2020.

Is an Accommodative Fed Bullish For The Stock Market? Quite the Contrary

Source: Elliot Wave International

Note how the periods in which interest rates were cut (between 2001 and around 2003 and then again between 2007 to late 2008), the stock market fell, in both instances suffering drawdowns of more than 50%.

If something similar were to happen again, then don’t be surprised to see assets like pink diamonds thrive, as investors seek tangible assets that can at least protect capital through such periods of turmoil.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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