17 Aug

Pink Diamonds and Big Shorts

Like most of Australia, we’ve well and truly found ourselves wrapped up in Matildas fever this week, joining the rest of the country in cheering on the women in green and gold.

With so much attention on the Women’s World Cup, it would be easy enough to forget that financial markets, and the investment world continue to function, with risks and opportunities continuing to present themselves.

In this week’s market update, we look at a major risk factor and warning sign from a famous investor, which suggests that now is the time to be cautious when it comes to traditional assets.

We also look at another research piece which highlights why commodities are potentially set for a period of strong performance.

Risk in traditional assets. Commodity market outperformance. This is the perfect environment for pink diamonds to thrive, as we will highlight below.

A risk factor worth watching

In the investment world, it’s understandable that at times, people simply get lost in the data. We know we do.

Sometimes it’s better to look at what SOMEONE is doing, rather than what a particular data point suggests, if for no other reason than that someone can help crystallise a view in your own mind about what is going on in investment markets, and how you can best prepare yourself, and your portfolio.

This week, that someone is none other than a gentlemen by the name of Michael Burry, who runs a hedge fund called Scion Capital.

Burry is of course the man that made himself and his clients hundreds of millions of dollars during the Global Financial Crisis just over fifteen years ago, with his successful bet against the US housing market represented in the hit movie The Big Short, where his character was played by Christian Bale.

While no investor has a perfect track record, Burry is very good at what he does, with an extract from the Michael Lewis book The Blind Side (sourced via Livewire Markets) noting:

“In his first full year, 2001, the S&P500 fell 11.88%. Scion was up 55%. The next year, the S&P 500 fell again, by 22.1%, and Scion was up again: 16%. The next year, 2003, the stock market finally turned around and rose 28.69%, but Burry beat it again, with returns of 50%.”

Burry (not Bale) is back in the news this week as his most recent regulatory filings reveal that he has a $1.6 billion short position betting against two major US stock market indexes, the S&P 500 and the NASDAQ 100.

These positions stand to benefit Burry if the market falls away, which he clearly believes is going to happen.

So far, the charts suggest that he may be right, with the below image tracking the performance of the S&P 500 over the past two and a half years.

S&P 500 Large Cap Index

Source: StockCharts.com

While the market has rallied for most of this year after a big pullback in 2022, it now looks like it has hit serious resistance, with technology stocks, which have recently led the market higher, looking particularly fragile.

If it is to take a turn for the worse, we can expect that defensive, inflation protecting assets should outperform.

That would include pink diamonds.

Commodities to outperform

While traditional assets are at risk of a major fall, with high profile investors like Burry positioned to profit from said fall, commodities are poised to rally.

At least, this is the view of PIMCO, one of the world’s largest investment managers. In a recent interview they noted that a lack of supply or investment in extra capacity, coupled with demand that is driven (ironically, some might say) by the move to a net-zero economy, and a historical correlation to high inflation will all combine to see commodities perform well.

It also has to be said that investor positioning also favours a commodity rally, with the chart below suggesting commodities are currently unloved.

Covered shorts in commodities
Net % FMS Overweight Commodities

Source: BofA Global Fund Manager Survey

That’s a good sign, and points to the potential that commodities as a whole have going forward, and why they could be so beneficial as an investment.

Pink diamonds are set to be a standout commodity in the period ahead, both as a profitable investment in their own right, but also in the context of a portfolio, given that they:

  • Have led the market in terms of performance, with price growth of over 600% since the early 2000s.
  • Tend to hold or increase in value during recessionary periods, unlike other commodities which tend to crash.
  • Are genuinely scarce, with 90% of annual global production coming from the now closed Argyle mine, unlike other commodities where supply can be rapidly increased.
  • Will always benefit from demand by investors and consumers wanting to own discreet, visually beautiful items.

These factors will likely lead to an environment where pink diamonds continue to thrive, especially if share markets and other traditional assets struggle and inflation remains problematic.

It could the opportune time to add them to a portfolio.​​​​​

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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