09 Oct

Two-speed market for pink diamonds

It has been another eventful week for investors, with 2023 looking like it will end with renewed volatility in a range of asset classes.

This volatility, and the need to both protect against it, as well as the need to find fresh avenues to generate growth in a portfolio, have been some of the key drivers of pink diamond demand over the last few years.

The volatility in asset classes is best seen in global share markets, which are again beginning to sell-off, after a stronger than expected start to the year.

In the United States, the S&P 500 is down 6% in the last month, while the ASX 200 in Australia is down by a similar amount, and now back below 7,000 points, a level it first reached back around 2007.

Oil prices have also moved sharply higher, last trading near $90 per barrel, which is one of the key reasons that inflation is not falling as fast as we’d all like, with recent data suggesting prices in Australia were rising by 5.2% per annum in the year to end August.

Meanwhile interest rates also remain at problematic levels for most households, with the likelihood that this will get worse before it gets better. This was made clear last week by the Reserve Bank of Australia.

Despite keeping interest rates steady at 4.10% at their meeting last Tuesday, they warned of the likelihood that they may raise rates further before the year is out, specifically noting that, “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe.” 

We delve into the challenges investors and households are facing, and their likely impact on the pink diamond market, below.

Times are getting tougher

Inflation protection has long been a major driver of pink diamond demand.

Given their extremely limited supply, and the fact that this supply can’t be easily expanded in any meaningful way, these unique assets have long benefitted from demand from those investors looking to protect against consumer price inflation that would eat away at the real value of their savings.

In the last couple of years, the inflation phenomena has morphed from a threat or a painful lesson from the history books to a real-world experience, with most Australians, and indeed households worldwide, experiencing their first period of sharply rising consumer prices in their adult lives.

About 1.2 million Australians have come off fixed rate mortgages in the last 18 months.

Everyone reading this update, and we include ourselves in this, is being impacted to some degree, with rental prices and mortgage repayments soaring, transport costs rising by more than 7% a year, and electricity up by more than 10%.

It’s getting tougher out there.

Authorities and policymakers are obviously acutely aware of the challenge that soaring cost of living poses, with a recent article published by the ABC citing RBA documentation, that, after discussions with the National Debt Helpline noted the Helpline had, “reported a significant number of callers experiencing hardship who are accruing additional debts via credit cards, Buy Now Pay Later, borrowing from friends and family, and increasingly unpaid obligations to the ATO, their utilities providers and council rates.” 

The challenge of higher inflation has also well and truly become a middle and upper middle-class challenge too, with the article noting that the ranks of people seeking assistance include those who are gainfully employed, and often on six figure salaries.

With more than half a million Australians still set to come off fixed rate mortgages (about 1.2 million have come off them in the last 18 months), there will be more pain to come.

That poses a threat to the economy, which may head toward a formal recession, noting we are already in a per capita one. It also poses a threat to most mainstream asset markets, which are richly valued.

It can also be expected to impact the pink diamond market, as we explain below.

Records keep getting broken

In the short-term, the financial stress that more Australians are going through is causing liquidity challenges for parts of the pink diamond market.

Put simply, when interest rates and inflation were low, there was a greater number of people both willing and able to allocate money to these precious assets.

This helped drive prices higher, whereas the current environment is seeing parts of the market remain more static, though importantly, prices continue to rise, albeit at a more modest overall pace, and with less turnover.

Over the medium to long-term, the financial market and economic environment will continue to support pink diamond demand, and pink diamond prices, given the following factors:

  • There is minimal to no leverage in the pink diamond market, minimising the risk of forced sales, whereas highly speculative markets have this additional risk factor.
  • While interest rates are set to fall in the coming year, inflation will most likely remain at high levels, meaning real rates on money in the bank will continue to be negative, fuelling demand for hard tangible assets like pink diamonds.
  • Records continue to be set in parts of the pink diamond market, most recently evidenced through a Sotheby’s auction that included a Fancy Intense Purplish Pink Diamond Pendant on a diamond necklace that sold for more than GBP 150,000, five times its expected price.

Given the above factors, we remain optimistic on the outlook for the pink diamond market, and the unique role these assets can play when it comes to both protecting and building wealth.

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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