Recent market events have me sitting up and taking notes. Most of the past year I have been focused on building and running my little main street business, Good Find. Good Find is a resale and consignment boutique in Thousand Oaks, California, which I started after leaving my last corporate job in the fourth quarter of 2018. There were hundreds of personal considerations that went into my decision to start a resale store, and a few investment and business reasons, too. Part of the investment thesis was that, over time, the large supply of semi-valuable personalty and collectibles available in the market today would hold up better in value than the current dollar. In other words, I thought better-quality home goods, art and collectibles would provide a hedge against the programmatic inflation our economic system is based upon. Our economy has expressly run on an inflationary, acceleratory platform, which has been fueled mainly by debt for the past fifty years. It seemed like an easy bet against that trend sustaining very well, and my tiny retail shop is a part of my bet against it. There is no way I could have anticipated the current confluence of events: The coronavirus outbreak, and its attendant effects, the Saudi/Russian oil production rift, and the off-shore dollar shortage. These things are happening at a time when US political leadership is simply not available to take our call. In my opinion, it is also consequential that the bitcoin halvening is coming up in just a little more than a month. With so much going on, I am riveted to my Twitter feed and other news sources. This is a difficult and complicated time, but also an opportune one.
As the covid-19 emergency broke out, there was the obvious short trade. Now, with super Fed intervention and the beginnings of a pandemic response taking shape in the US, the trade is definitely still down, but the timing and magnitude are very uncertain and so the trade is not as straight forward. I have no doubt there are a lot of great trades out there, and at the high level, I remain short the broad index through the end of the year, and I am long junior gold miners. But right now I am particularly interested in silver and the silver ratio. The silver ratio is the price of silver to the price of gold. Today, gold closed at $1,603.40 and silver at $14.40 for a ratio of 111:1 . Over the course of the 20th century, the average ratio was 47:1. It has been higher over the past 20 years, averaging about 60:1. The ratio is now nearly twice as high as its average over the last twenty years. It is possible that the price relationship is a broken metric. It may no longer hold up due to extraction cost improvements from modern mining methods, the expansion of silver’s use as an industrial metal versus medium of exchange, or any number of other fundamental reasons why the ratio should now be much higher than its historical average. Maybe it will not revert to mean, or maybe the ratio will revert as a result of a steep drop in gold’s nominal price without a correspondingly deep drop in silver prices. I just don’t know. But in the past I have had great success looking at big dislocations like the wide silver/gold ratio and thinking my way back to a trade. In this case, I feel this is a trade that has its full expression ahead of it yet.
Moreover, I like this trade because it speaks directly to my main street interests, and is something everyday people in the community and especially the resale community can be aware of and take advantage of, or at least plan for. Not every consignment store or reseller maintains silver items in their product spectrum, but many do. And for others, silver is a big part of total inventory, particularly for silver jewelry. If main street buyers and sellers can have a window into some of what is coming for the economy, the dollar, the price of silver and how to plan for their inventory, it will strengthen our communities and give useful, actionable information to people who can employ it. Real people. Business owners, pickers, collectors, sellers alike.
So for my first day looking at this trade I have tapped in to resources at the Chicago Mercantile Exchange https://www.cmegroup.com/trading/metals/precious/silver.html, the Silver Institute https://www.silverinstitute.org/, and the internet-at-large to come up with some newsletters to follow and to begin a list of companies to watch. My initial thesis is I think silver may yet see some really shocking lows as we move through the dollar shortage in international settlement, but then to the moon. I don’t have my own price thesis built yet, but targets by the experts are for $18.50 to $22.50 by year end. From today’s spot price at the close of markets of $14.40 that would be a gain of between 28% and 56% by year end. The estimates were made in research that was being released in the middle of February, and does specifically address the potential impact of the virus on China, but the analysis may not have fully comprehended the global impact, and so the price of silver by year end could be very different if you asked the same experts now.
Before the market close I opened an order to sell an October put at $11. I was asking $0.80, which was a little above the market ask price of $0.77 at the time I placed my order. The market closed without getting done. I will be spending the next few days looking at this trade and researching it more. Follow for updates on what I learn. Share and re-Tweet if you know others who would be interested. Stay safe,