Update No. 27 – 02/10/11

I write this blog mid-week before it is to be posted (i.e. prices used were sourced Wednesday – don’t scream if they’ve changed, they change all the time!), after looking back through my posts last week to find the post I referred to in last weeks blog, I found my proposal in Update No. 6.  I thought I might review it this week, the post proposed a way to potentially speculate in what I viewed as an overheated silver bullion market.

Regular readers will remember that I proposed the following ‘pairs trade’:

• Buy 60oz platinum @ AU$1,662.98 per oz for $99,778.80
• Sell 2,375oz silver @ AU$42.01 per oz for $99,773.75

We are now 133 days (19 weeks) down the road; let us review how the trade would look if we closed it out now:

• Sell 60oz platinum @ AU$1,517.33 per oz for $91,039.80 (Loss = $8,739)
• Buy 2,375oz silver @ AU$29.41 per oz for $69,848.75 (Profit = $29,925)

So the pairs trade worked almost exactly as we wanted/expected it to, and I have demonstrated how we could potentially make money in a (sharply) falling market.  The platinum price, which was trading below it’s historic average (relative to gold), has declined only modestly (about 8.8%), and the silver price, which I demonstrated was at it’s all-time high (in relation to gold) has declined the majority of the way (30% in real terms) to the long term mean (a further 20% decline relative to gold would return it to the long-term mean (1/65^th the price of gold per unit). The total gain demonstrated above of $21,186 represents a 10.62% profit over the 133 days, or an annualised gain over 30% (I haven’t followed the prices closely, but I am sure there were probably greater profits at some point).  Given that the EGP share price has done virtually nothing in the same period, fellow holders may question why I didn’t take on such a trade.  The answer is simple, when it comes to currencies, commodities and other tradeable items, the underlying causes of the movements are too hard to pick.  Now, share prices can swing just as wildly as the last month or two have reminded us (funny the swings only seem wild when prices head down though…), however the drivers in increasing the prices are much more predictable.  Relying on mean reversion is not an investing format I am comfortable with; in the long-run owning outstanding companies with sound fundamentals will prove more profitable I believe.

Gun to my head, if you make me choose a precious metal to own, I would still take platinum over silver/gold as it is still very close to historic lows in relation to gold price.  By the way, this is an absolutely imperfect view to hold, there may have been a great many platinum discoveries over the past few years that have reduced the scarcity of platinum relative to the other precious metals, which has led to the lower ratio; or a variety of demand factors could have forever changed the precious metals market.  Think about these things before you storm the Perth mint & buy hundreds of kilos of bullion (under AU$50,000 per kilo after recent price falls! Cheap as chips!)

Many of the underlying macroeconomic factors can be the same for stocks as for commodities, for example, when the global economy is weak, commodity prices fall due to weakened demand & stock prices of companies producing those commodities will fall as they will make less profit at the lower prices.  Gold and Silver can sometimes defy this trend, due to their perception as a currency/store of value, but correlated price movements can often hobble this argument as we have seen in the last couple of weeks.

Imagine this – the price of the commodity a company produces stays static for 10 years (for some reason).  The price of the company could still grow if it increases production and controls costs.  The other thing a company can do that a commodity can’t is use the cash it generates to buy new businesses or expand in other ways.  So provided you can pick a company with the right fundamentals, you won’t have to rely on the greater fool to be successful – Tony Hansen 02/10/11

EGP Fund No. 1 Pty Ltd. Down by 9.03%, leading the benchmark by 2.55% since July 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Down by 1.4%, leading the benchmark by 13.73% all-time (April 1^st 2011).

EGP 20.  The EGP20 index is Down by 14.81%, lagging the benchmark by 3.23% since July 1^st.  Since inception the EGP20 is Down by 24.72%, lagging the benchmark by 9.59% all-time (since April 1^st 2011).

S&PASX200TR  The benchmark index is Down by 11.58% since July 1^st. The benchmark is Down 15.13% all-time (since April 1^st 2011).