01 Dec

Volatility, price records and pink diamonds

Christmas 2023 is now officially less than a month away, with the calendar ticking over to December today.

And while we hope all of our clients will get plenty of time for relaxation, as well as quality time with family, friends and other loved ones, there are still investments to consider, risks and opportunities to weigh up, and portfolios to manage, both over the next month, and as we look forward to 2024.

From our vantage point, we’ve been more than satisfied with the performance of pink diamonds this year, with the market continuing to see price growth, the pool of potential investors continuing to grow, and the rationale as to why you’d invest in this niche asset class only strengthening as we approach the new year.

We discuss this in more detail below, looking at a market warning sign we should all pay attention to, and news that highlights the support that the pink diamond market is seeing today.

The calm before the storm

Volatility has a bad name in the investment world. After all, whenever markets fall, we often refer to them as being volatile.

And while this isn’t a false label, it’s incomplete at best, as markets can be volatile to the upside as well, and we are yet to meet the investor who is upset when any asset they own shoots up faster than they were realistically expecting.

Nevertheless, the overall volatility of the market is something worth keeping an eye on, as it can give a very useful indication of overall market sentiment, which helps one assess what is likely to happen in the months and years ahead.

In the investment world, there is a widely followed index to measure volatility in the market.

This index, literally known as The Volatility Index (or VIX for short) is frequently referred to by market commentators, with peaks in the VIX often occurring when markets have suffered a huge sell-off.

Conversely, low points in the VIX often occur when the market is trading at much higher levels, and a false sense of security has begun to creep in.

This can be seen in the chart below, which plots changes in the VIX going back 30 years or so. The index itself is simply expressed as a number – with the long-run average being 19.60.

CBOE S&P 500 Volatility Index (^VIX) Level
Volatility Index ($VIX)

Sources: Creative Planning, @CharlieBilello

The low points and subsequent spikes in the VIX clearly align with era-defining moves in the stock market, and broader economy. For example, you can see the VIX was very low back around 2007 and 2008, before exploding higher to more than 50 (its highest point ever at the time) when the Global Financial Crisis hit.

The same thing occurred in the lead up to 2020, just before COVID-19 made its way around the world, with the VIX index surging to more than 75, the highest point ever recorded.

In both periods when the VIX soared, stock markets plunged globally, including in Australia, while hard assets like pink diamonds thrived, as investors sought them as either a hedge against recession, losses in other parts of their portfolio, or inflation protection.

This is highly relevant for investors today, and as we look forward to 2024, considering that last week the VIX closed below 12.50. This is the lowest level it has traded at it in nearly three years, with @CharlieBillelo, who shared the above chart noting that, “the 41% decline in the VIX over the past 4 weeks was the 9th largest 4-week decline on record (note: the VIX dates back to 1990).

Markets follow cycles, whether we like it or not. Periods of calm create periods of turmoil, which eventually play out and calm returns. The VIX is currently at a reading that suggests extreme calm.

Forward-thinking investors know what is likely coming next.

They will take steps to protect and grow wealth through such a scenario, with assets like pink diamonds tried and tested in situations like the one we likely face going into next year.

Records falling in the pink diamond market

While there has been a reduction in overall turnover in the pink diamond market in 2023, it has not impacted performance, with prices for these rare, beautiful and lucrative assets continuing to rise.

This is being seen in industry data, as well as through media articles and auction results, which admittedly tend to focus on the absolute high end of the market, where stones in excess of 10 carats trade, either as a standalone asset or embedded in a jewellery item.

A recent example of this was the sale of the Pink Supreme, a ring featuring a 15.48-carat pink diamond. It recently sold at a Christie’s jewellery auction in Hong Kong, where it sold for just under $85 million Hong Kong Dollars, which translates to almost USD $11 million.

According to a recent article, “the cushion brilliant-cut, fancy-intense-pink, internally flawless diamond was one of several coloured diamonds comprising the top five at the November 27 Magnificent Jewels sale. The sale price fell within the piece’s HKD 70 million to HKD 100 million ($9 million to $12.8 million) presale price range.”

News stories like this, our conversations with trade partners and industry contacts worldwide, and of course our engagement with our thousands of clients in Australia all give us great encouragement about the outlook for pink diamonds.

While turnover may remain subdued for some time, especially while interest rates remain high, there is strong underlying demand for these assets, which is not only helping keep prices supported today, but will likely push them much higher in due course.

The storm clouds that are building in the global economy, and in financial markets, which we alluded to earlier in this article, will only exacerbate demand, and therefore support for this niche asset class, as investors worldwide seek inflation protection, diversification and investment growth in the difficult environment ahead.

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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