Diamond demand is rising, and gold is at a record high price -- either the boom is back, or investors are buying anything to dodge the crumbling U.S.
Diamond demand is rising, and gold is at a record high price -- either the boom is back, or investors are buying anything to dodge the crumbling U.S. dollar.
In truth it is probably a bit of both, not that it really matters for WA which wins whatever force is driving commodity prices sharply higher.
Gold, until now, has been the bellwether signalling a rush out of depreciating U.S. dollars as the American Government forces more of its paper money into circulation to stave off a second recessionary wave, which also has the effect of reducing the value of dollars in circulation.
Diamonds, as shown in Rio Tinto's $US803 million re-start of work at its Argyle mine, are the latest arrival at the commodity party which has also been a factor in pushing up other metals, including nickel and tin.
While the decision to go ahead with converting Argyle from an open pit into an underground mine was seen by some observers as a surprise it is actually a very good indication of the two biggest economic forces at work in the world today.
On the conventional economic front it is Asian buyers leading the rush into luxury goods such as diamonds and gold - because they have more cash to make those purchases than consumers in slow-growth Europe and the U.S.
On the unconventional front there is a fascinating game of "substitution" underway with investors soaking up high-value, low-volume commodities, as a hedge against the falling U.S. dollar.
Gold has been the substitute of choice for the past 10 years outstripping all other investment classes with its rise from around $US260 an ounce to its latest price of $US1270/oz.
The problem with a rise like that is that an increasing number of investors believe that it cannot continue indefinitely despite the threat of an outbreak of worldwide inflation thanks to the U.S. printing vast amounts of new dollars.
If not gold, what else? That's why some close watchers of the metal markets have seen unusual activity in the nickel and tin markets where some of the metal in warehouses is said to be "not for sale".
Those two high-value metals, which sell for around $22,000 a tonne, have been acquired by speculators and industrial consumers as a hedge against the falling U.S. dollar and because there is a belief that the world economy is recovering at rapid rate - despite Europe and the U.S. wallowing in recessionary fears.
For commodity-focussed WA higher metal prices are good news. In time the effect of fresh investment in iron ore, gas and now diamond-mine development, will flow through the economy, perhaps even triggering a rebound in property prices next year.
If the property market does follow the commodity sector, which it always has in the past, then it might be argued that the entire state of WA has become a hedge against the falling value of the U.S. dollar - an event which would have economists scratching their heads.
There is, however, a danger in what's happening. Investments made simply to dodge the falling value of a currency, even one as important as the U.S. dollar, can be easily liquidated if the economic winds change, quickly wiping out the gains seen over the past 12-months.
For that reason it would be best if the strength in prices for diamonds, gold, nickel, tin and other commodities was a genuine reflection of consumer demand, and not a form of currency speculation.
