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 $4.2 trillion in February to as much as $7.1 trillion in October. Much of 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 can be very tricky to execute –and, like-wise can result in adverse effects. For instance, this action could result in unintended debasement, or dilution in the value of a currency, or similarly 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 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 a 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 in part 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 made a post-pandemic record high in U.S. dollars.
While the ultimate effect of the aforementioned stimulus measures on the U.S. dollar and asset prices is almost impossible to pinpoint –as it depends on how, and who to, 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 is on the mind of investors and others that move markets.
Regarding diamond prices, there were a small-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 market to that of demand, have only marginally lowered prices despite jewelers 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 year-to-date according to Paul Zimnisky data (see above chart).
In general, diamond miners, especially the majors, have not aggressively lowered rough prices since the start of the pandemic and jewelers have been reluctant to lower polished prices, as has traditionally been the case. 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 by those that hold them, in a way like gold –and, thus they are rarely put on sale, especially in an environment like the present where economic uncertainty is abound and currency debasement and inflation is on the forefront of minds.
This was published in print in The Northern Miner.
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 please consider subscribing to his State of the Diamond Market, a leading monthly industry report; an index of previous issues can be found here. Paul is a graduate of the University of Maryland's Robert H. Smith School of Business with a B.S. in finance and he is a CFA charterholder. He can be reached at firstname.lastname@example.org 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. Please read full disclosure below.