Despite the ongoing threat to the economy and to financial markets from COVID-19, and the impact that it is having on our daily lives, opportunities to grow your wealth still exist in the investment world today.
In the coloured diamond space, we are still seeing strong demand for high quality stones, with auctions in Hong Kong this week seeing some coloured diamonds selling at a 30% premium relative to their pre-auction highest estimates.
That is a show of strength, highlighting the fact that investment demand for high quality coloured diamonds remains as strong as ever.
It is our belief that these already strong levels of investment demand will only grow in the years to come, as we explain in detail below.
Why You Need To Diversify
This week we came across another illustration of why investors need to diversify their wealth, and why tangible assets like pink diamonds offer a unique opportunity for wealth protection and growth in the years ahead.
That illustration can be seen in the chart below, which comes from popular Australian finance and investing blog MacroBusiness.
The chart looks at the performance of the Australian dollar vs. the US dollar (pink line), and the performance of the S&P 500 (black line) equity market in the United States from early February to early July 2020.
In the chart, both the currency performance and the stock market index have been rebased to 100 for ease of comparison.
AUD vs SPX index
Note how correlated they are.
Whilst equities were plunging during late February and late March, so too was the Australian dollar. If you are an Australian investor and had money in the share market during this period, then it wasn’t just your stock portfolio that got hit.
The value of your house, your superfund, and your savings in the bank were all also negatively impacted, due to the fall in the value of the Australian dollar.
In the last three months, both the Australian dollar and the stock market have rallied strongly together, but there are two things to keep in mind when assessing this strength.
The first is that a risk of another plunge in equities, and in our local currency, can’t be ruled out, as the economic environment continues to deteriorate.
The second point to consider is that the only reason the market is rallying is because central banks are printing money at the fastest pace on record, and governments are running huge deficits, part of which is being funded by the central bank money printing.
Combined, these factors create long-term inflation risk that pose a threat to all investors.
To best protect, and even grow your portfolio in the face of such risks, a chart like the one above should serve as a powerful reminder of how important it is that you own assets that:
- Have a history of maintaining or growing wealth even when stock markets fall.
- Benefit from a decline in the value of the Australian dollar.
- Are limited in supply and benefit from higher potential inflation.
Pink diamonds are one such asset class that have not just one or two, but all three of the above characteristics, as you will see below.
History Proves Pink Diamonds Work
Throughout the Global Financial Crisis, the European Debt Crisis, Brexit and the election of Donald Trump, pink diamonds provided capital stability to investors, helping protect their overall portfolio.
The fact that they benefit from a fall in the value of the Australian dollar is also a benefit to most local investors, for the simple reason that it allows them to internationalise their portfolio, bringing in some much-needed currency diversification.
Finally, from an inflation perspective, as they are hard tangible assets that are incredibly limited in supply, pink diamonds can be expected to not only maintain their purchasing power but outperform other assets, as they have over the last fifteen years with returns of more than 11% per annum over this time period.
Looking ahead, it is almost inevitable that investors will increasingly prefer to store their wealth in assets like pink diamonds, rather than keep all their money in a bank account or term deposits which pay next to no income.
That additional demand, coupled with the limited supply mean that the outperformance of pink diamonds may well continue for years to come.
Given these factors, it is no surprise to us that we have seen a huge uptick in enquiries at Australian Diamond Portfolio in the last few months.
Our astute clientele are taking advantage of the recent strength in the stock market and the rise in the value of the Australian dollar, and are looking to move some of their investment portfolio into pink diamonds, so as to better protect and grow their capital in the months and years ahead.
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.