Commentary: Inflation concerns support diamond prices

The U.S. dollar, as measured by an index tracking it versus six major currencies including the Euro, Yen and Canadian dollar, is down almost 10% from the highs in March to mid-October. The weakness is at least in part a response to record economic stimulus by the U.S. in the form of cash payments and also suppressed interest rates – the former reflected in the Federal Reserve’s balance sheet, which rose from US$4.2 trillion in February to as much as US$7.1 trillion in October. Much of the Fed’s asset expansion is the result of “created” money via “Open Market Operations,” a mechanism the bank uses to influence the supply of money in the system.

Stimulus can temporarily provide a much-needed jolt to the economy or offer a bridge to better economic times. However, such monetary policy strategy is complex, highly nuanced and tricky to execute, which can result in adverse effects.

For instance, the action could result in unintended debasement, or dilution in the value of a currency, or to inflation, an increase in prices in a relative currency due to a decrease in a currency’s purchasing power, both of which can lead to the erosion of confidence in a fiat currency. In such a circumstance, assets that maintain their real value appreciate in value in nominal terms, and, the value of cash, from the standpoint of purchasing power, theoretically decreases.

The above conundrum can make investors, or anyone for that matter, uncomfortable holding cash, and thus spur the purchasing of assets that are expected to maintain their value. This is, arguably, what has driven the U.S. stock market to an all-time high in early-September, despite the severe global economic consequences of the pandemic. The same has been seen in other assets and commodities, including gold, which also reached a post-pandemic record high in U.S. dollars.

The ultimate effect of the stimulus measures on the U.S. dollar and asset prices is almost impossible to pinpoint because it depends on how, and to whom, the stimulus money is distributed; how and when it is spent (and how that impacts the economy); as well as the effect relative to other currencies and the global economy as a whole. That said, the current flow of investment dollars seems to imply that currency debasement and inflation are on the minds of investors and others that move markets.

Regarding diamond prices, there were a handful of rough tenders and auctions held (in a very illiquid market) in the midst of the global lockdown that yielded prices of -20% to -30% from 2019 levels. However, the major diamond miners, in accordance with a “value over volume” strategy of matching supply released into the market to that of demand, have only marginally lowered prices despite jewellers around the world being closed from late March through at least June. Further, as of October, a basket of polished diamond prices at the retail level is actually up a low-single-digit-percentage this year.

In general, the diamond miners are not giving away rough and the jewellers are not giving away polished. While typically viewed as more of a discretionary or luxury product than an investment, diamonds are still seen as a rare, “store-of-value” hard-asset, in a way like gold, and those that hold them rarely put them on sale, especially in an environment of global economic uncertainty and concern around currency debasement and inflation are top of mind.

— Paul Zimnisky, CFA is an independent diamond industry analyst and consultant based in the New York metro area. For regular in-depth analysis of the diamond industry, see his State of the Diamond Market, a leading monthly industry report. He can be reached at paul@paulzimnisky.com and followed on Twitter @paulzimnisky. Disclosure: At the time of writing Paul Zimnisky held a long position in Lucara Diamond Corp, Mountain Province Diamonds, Star Diamond Corp and North Arrow Minerals Inc.