And..., Here We Are at Silver $22
Two or three years ago, when this site was becoming a festival of hyper-confident, hyper-certain gold bugs, I made a few bets with them. I bet Christopher Barker that PM stock would outperform gold. And I bet frankydon'tfailme in 2011 that Silver would see $22 before it ever saw $40 again (if it ever did).
I have already reported on the scorching outperformance of PM vs. Gold (which just got more extreme in the last two days). (Now you should know I actually think PM is probably a fair bit overvalued as of this writing, but we're just talking about share prices and dividends.) It is with a bit of sadness (given franky's CAPS score, which hopefully does not reflect a lot of real money investments/trades), that I now report SLV has hit the $22 handle.
Fundamentally, the thesis behind these long trades was that uncontrollable hyperinflation was going to be the result of Fed's actions/US debt. Added to this was a common stream of thought, that we would eventually go back on some sort of gold standard (thus implying some optionality of even greater gains). At the risk of hubris, I have to admit the jury is not out on that. But mainstream economic theory has never supported it, the Fed's PREcedented actions (see the 1945-1952 era) have never supported it, and sometimes the experts and the mainstream are considered to be such for a very good reason. I have blogged about that stuff ad nauseum, mostly in 2010, back when respected organizations like Washington Post and LATimes were blaring loud and wrong headlines about the "unprecedented" nature of the Fed's actions, have apparently never bothered to actually check the precedents....
I am not a genius. I just made the considered decision that if Warren Buffett was saying one thing, and a bunch of strangers on fool.com were saying one thing, the odds were quite strongly in favor of Buffett being right. And I boned up on monetary policy to confirm my instincts.
Another way I anticipated this is that gold and silver minors always outperformed the metals themselves. As I blogged about, including at Kid Dynamite's independent blog: these companies are still companies, their value may thus only include the discounted value of all of their future cash flows, forever. The fact that the market was never willing to assign them much higher multiples was, in my view anyway, always a signal that the market did not expect the prices of these metals to remain so high forever -- their cash flows would not always be so high, let alone higher.
Now of course I've posted these two posts, and if SLV and GLD suddenly shoot to the moon, I'm going to get reamed! But who cares? That's what the market is about. That's what calls are about. That's what laying it on the line with money (I own PM, no gold) is about, and accountability. Much as many things about Mr. Barker have annoyed me, one thing I continue to respect him for was/is his willingness: a) to put his own money on the line, and b) his willingness to publicly state a position. I try to be the same. May the best man win. Right now, I am, so some (hopefully not temporary) gloating is in order.