It’s been another troubling week of developments on the COVID-19 front, with large parts of Queensland looking like they may join New South Wales in a multi-week lockdown, while variants of the disease are again causing problems in countries like Israel and America.
In financial markets volatility is again becoming a factor, with the Australian dollar for example beginning to suffer, while iron ore, our key commodity export here in Australia, now down about 20% from its all-time highs earlier in the year.
Last week also saw further evidence that inflationary pressures continue to build across the economy, with the latest data suggesting prices in Australia increased by almost 4% in the year to end-June.
Compare that to current bank interest rates which are close to 0%, and you can see why investors are increasingly looking for alternative ways to protect and grow wealth.
Pink diamonds will remain one of the key assets set to benefit as these trends play out in the years ahead, particularly as the costs caused by COVID-19, and the lockdowns designed to prevent its spread are only set to grow.
Lockdown costs will grow!
Given the length of the lockdown residents in New South Wales are currently going through, and the lockdowns seen in Queensland, South Australia and Victoria of late, there is no doubt we are going to see a massive hit to economic output in Australia.
Some forecasters suggest the decline in output will come to something in the vicinity of 3%, with a strong likelihood that Australia will formally enter a second recession by the end of the year.
Given the hit to consumer and business confidence that this lockdown has created, and the lack of governmental support relative to last year, it’s also one we may take some time to bounce back from.
All this means that the Federal budget (which was already in disarray after last year), is going to get worse before it gets better, with higher levels of government debt a certainty.
The Reserve Bank of Australia (RBA) is also in a bind, with market forecasters now suggesting that the RBA should and indeed will increase the size of its money printing, or Quantitative Easing (QE) programme as it’s more formally known as, from AUD $5 billion to AUD $6 billion per week.
Meanwhile, the Commonwealth Bank of Australia now expects the RBA’s next round of QE, which is set to start in September, will total AUD $160 billion in size, up from their original forecast which suggested this programme would “only” total AUD $50 billion. For anyone that is counting, that additional AUD $110 billion comes to roughly $4,500 for every man, woman and child in Australia.
The end result of all of this is that interest rates are going to have to stay on the floor for even longer, and as a society we will have to get used to inflation rates that are higher for longer.
That makes it a terrible time to be a saver in the traditional sense, but it also helps make it a fantastic time to be an accumulator of rare, tangible, discrete assets.
There’s only one Argyle Diamond Mine!
Over the weekend just gone, we read with interest a story on the ABC regarding the potential reopening of the Ellendale Diamond mine, which, like Argyle, is located in the Kimberly region of Western Australia.
Given the sharp rise in the price of pink diamond prices over the past 15 plus years, including a 20% plus spike since the Argyle Diamond Mine closed last November, we aren’t surprised there is renewed interest in Ellendale, which was once well known as a major supplier of yellow diamonds.
The most important thing to keep in mind as investors is what is the potential impact on the reopening of Ellendale on the market for pink diamonds, and their price trajectory.
In this regard, we don’t think Ellendale will have much of an impact at all, as while yellow diamonds are worth more than white diamonds (typically two to four times as much), they are no way near as valuable or as highly sought after as pink diamonds are.
This was made clear in the article itself, with one of the people involved in the project noting that yellow diamonds are “not as rare as the pinks, the reds or the blues”.
These are of course exactly the types of diamonds we specialise in procuring for our clients at Australian Diamond Portfolio.
The article also noted that; “since the last quarter of 2020, prices have been on the rise and the fundamentals of the diamond industry are such that there is a shortfall in supply forecast over the next 10 years or so.”
We couldn’t agree more, and it’s one of the main reasons we remain so bullish on pink diamonds, and see prices rising much higher in the next decade.
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.