How will the Current Market Uncertainty Affect my Australian Pink Diamond Investment?
The significant downturn in the Australian stock market – around $60billion was wiped off the market value of companies listed on the All Ordinaries Index – the last 48 hours has prompted some of our clients to express concerns over whether or not their pink diamond investment will suffer a similar fate.
A lot of capital flowed into equity markets over the last decade seeking higher returns, especially with ultra-low interest rates on offer from conservative investment options like term deposits. So, what’s causing investor nervousness and the desire for safer harbours?
Broadly there are four main factors that are contributing to the current round of stock market jitters:
- For the first time since 2007, the U.S. Treasury bond yield curve inverted on Wednesday. In brief, this means that US two-year bond yields rose above the 10 year bond yield, a key indicator that investors are concerned that the US economy may be heading for recession. Historically in the US, this curve is strongly correlated with recessions.
- The on-going US/China trade war with no end in sight with the brinkmanship economic strategy pursued by the Tangerine Washing Machine continuing to cause real damage to world trade.
- Eurozone worries – Germany recorded a fall in GDP of 0.1% in the second quarter of 2019. It’s export focused economy is suffering from the fallout of Brexit, the trade war (tariffs on steel and aluminium) and the potential of the “doom loop” effect if the Italian economy goes more pear shaped – the Italian government owes $2.5 trillion euros in public debt.
- Asian markets – Chinese economic growth has slowed with industrial production growing at 4.8% (great by anyone else’s standards) down from 6.3% in July and its slowest rate since 2002. The Hong Kong protests aren’t helping, Singapore looks like its headed for a recession and Japan and South Korea have entered into a worsening trade dispute.
And we haven’t even discussed what’s happening in Brazil, Mexico and the implications of the 48% drop in Argentina’s stock market.
What impact, if any, will these current economic headwinds have on your Australian pink diamond investment?
There are several important ways in which Australian pink diamonds are different to other forms of investment:
- They are extremely rare. Pink diamonds account for less than 0.01% of Rio Tinto’s Argyle mine production. To put it another way, they make up less 1/100 of 1% of the diamonds produced by the mine.
- The Argyle mine is known as the largest source of high-quality pink diamonds, producing over 90% of the world’s supply. In fact, the colouring of stones from that mine is so unique that an experienced diamantaire can often identify the origin of the diamond by viewing the stone. The colouring of an Australian pink diamond is so vibrant that regardless of the size, they are considered excellent investments.
- Pink diamonds have consistently outperformed other classes of investment for more than a decade. Some categories of pinks have exceeded a capital growth rate of over 400%.
- The Argyle mine is closing in 2020 as it has become uneconomic for Rio Tinto to continue extracting any remaining gemstones. This will have a significant impact on the prices of pink, red, blue and purple diamonds, as acknowledged by Arnaut Soirat, CEO Copper and Diamonds, Rio Tinto.
Based on these factors, it is safe to conclude that savvy investors view Australian pink diamonds as a strong hedge against traditional investment market volatility. Therefore, it is highly likely that their value will continue to appreciate in the near term potentially at rates greater than other asset classes.
- Calculation based on advertised 3.5% term deposit rate less the current inflation rate of 1.9%