Pink diamonds await their catalyst

We are already more than halfway through 2024, with the calendar ticking over into July a couple of weeks ago.

While markets gyrated in their regular fashion, it was overall a rewarding one for most investors, with nearly all major asset classes recording increases in the six months to June 2024.

This includes the local share market, with the ASX eking out a small gain (circa 5%), while overseas markets including the S&P 500 in the United States were far stronger, rising by 17% YTD; and Bitcoin is up 30% so far this year, even after its recent correction.

Economy-wise, we also continue to see a trend of inflation that is stickier (which is to say, higher) than most market commentators and experts predicted, while economic growth has not only proved more resilient than forecast, but also looks to be increasing as the second half of the year gets underway.

This in turn has led to a scenario where interest rates in much of the world have stayed higher than expected in 2024, and indeed may go higher still in some countries. Most commentators were expecting and predicting a series of rate cuts this year, and while this has happened in many countries, it is not yet a completely global trend.

As an example, in both the United States and Australia, rate cuts are yet to transpire, with interest rates on hold in both nations, at least for now.

This theme of higher-than-expected inflation and no movement in interest rates, or even the potential for them to rise, was something we touched on in our most recent market update, with the news flow that we have seen in the weeks since still very much in line with this observation.

For example, the most recent set of inflation data released in late June in Australia was very troubling (the data was to end May 2024), with overall inflation rising by 4%. While this is more than double the 2% rate many policymakers like to target, a look under the hood of the inflation data suggests that the challenge ahead is truly profound, with essential items like rent (+7.4%), electricity (+6.5%), health (+6.1%), fuel (+9.3%), education (+5.2%) and insurances and financial services (+7.8%) all seeing particularly sharp price increases.

No wonder the internet is rife with stories of Australians doing it tough and struggling with cost-of-living pressures; where there is smoke there is fire, as the saying goes.

This higher than expected inflation has led to a scenario where markets are now increasingly of the view that interest rates will go up, not down, when the Reserve Bank of Australia (RBA) next move the interest rate needle, something that may happen as soon as next month, which is when the RBA next meet.

The increased likelihood of another interest rate rise in Australia is best seen in the chart below, which is published by the ASX, and shows the implied market expectations of a 0.25% increase in interest rates at the next RBA meeting.

30 Day Interbank Cash Rate Target Implied Expectation of change

It is telling us that at present, the market is suggesting that there is an almost 30% chance that rates go up in August. Crucially, there is no suggestion rates will go down.

While in the short-term this stalemate between interest rates and inflation may be causing some uncertainty amongst the investment community (including amongst clients of Australian Diamond Portfolio who may be looking at including pink diamonds in their portfolio for the first time or adding to their coloured diamond portfolio), market history dictates that one of the two will eventually give way.

This history also suggests that when push comes to shove, policymakers will always sacrifice price stability for economic growth (perceived or otherwise), as it is the path of least resistance, and the one that is typically seen as the most palatable.

It could be just the catalyst that the pink diamond market is waiting for.

Kickstarting the pink diamond market

Earlier in this article we commented on the price strength seen in other markets, with real estate, share markets and cryptocurrencies all rising in 2024.

The pink diamond market has also been resilient in 2024 with the Fancy Colour Research Foundation (FCRF) noting that there was sustained interest in the market in their most recent update, with diamond market experts correctly describing coloured diamonds as “an island of stability in this financial climate.”

The overall resilience in the pink diamond market has been pleasing to see, especially given overall turnover levels are far more subdued, which is a characteristic that has been in place for the better part of twelve months now, and the polar opposite of what we saw.

The broader higher inflation, higher interest rate environment is also likely to support the pink diamond market, as investors look for alternative safe haven assets. This is especially so given that:

• Inflation is terrible for fixed income assets like cash and bonds.
• Inflation is a long-term challenge for the property market.
• Inflation is a long-term challenge for the share market too.

The pink diamond market is also continuing to see positive news flow, with Barrons recently publishing an article on the Eden Rose, a beautiful 10.2 carat pink diamond that auction house Christie’s expected to go for somewhere in the USD $9 to USD $12 million price range.

It is also worth pointing out that despite the overall lack of hype in the pink diamond market today, it is still comfortably a market leader, outperforming other assets over short, medium, and long-term time periods. This can be seen in the table below, which comes from our recently updated 2024 Pink Diamond Investment Guide; it highlights and shows both total and annualised returns for the twenty-year period ending December 2023.

Asset Class Returns – 2003 to 2023

Sources: Australian Diamond Portfolio, LBMA, Vanguard

Given that pink diamonds are more scarce now than ever, and that all the potential drivers of demand (high inflation, expensive financial assets etc.) are all still in play, is there any reason to doubt that this trend will continue?

We think not.

Instead, we think that in time, the pain caused by higher inflation and interest rates will cause a rupture in markets, which will lead to a profound change in the way investors allocate their capital.

Pink diamonds would benefit from such a rupture, as they have in other periods over the last twenty years that have conspired to see demand spike, while supply of these assets remained finite.

As such, while we can’t promise that this period of slower price growth and lower turnover in the pink diamond market will end tomorrow or next month, we can say with confidence that we remain very positive on the future of this market, and that all the ingredients are in place for pink diamond prices to move higher in the years to come.

The catalyst will come in the fullness of time. Now is the time to get positioned for it.

As always, we hope you have enjoyed our latest edition of “In the Loupe” and we look forward to any questions or comments you may have.

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