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Animal Spirits, or Spirit Animal?

It is about twenty minutes after eight in the evening, and I am at the store. This morning while doing my financial markets reading, I was caught up in the animal spirits. I made my usual, daily entry in the record books that the market is stupid; it was another nice up day, of course, because now those are the only kind. And I read a few pump articles on Seeking Alpha about one of my favorite subjects: silver. Gold looks like it is trying to push and stay higher. Like I said, animal spirits. So I have made a little wager on the potential for a silver rally between now and July expiry. Here is (approximately) the trade:

I have a real hate for this market, and see many areas of weakness that beg for shorting, but with interventionism and the potential for truly major currency issues, this small, short-time frame bet in a familiar category was all the more animal spirit I could muster. And for the record, I only did this trade 2X, so sold 2 of the puts, etc. Come July expiry, if it has not paid off, I will seriously consider rolling the trade, just because I think this is a thing that is going to happen.

What sort of dynamics might the turbulence of the current climate cause in the silver markets? If there truly is a ‘V’ recovery, and industrial demand for silver recovers to pre-covid levels, will there be a supply crunch due to mining interruptions? What if industrial demand does not recover? Glut, and price crash? Could consumer demand off-set significant decreased industrial demand? Will silver ever have a place on the currency, collateral or savings technology spectrum again? Will we have major, state-sponsored infrastructure and industrial spending initiatives as a part of this cycle, which will fuel demand for silver in the longer term? Most of these questions can’t be answered within my option period, but silver continues to feature in my thoughts for its potential.

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One of the days in quarantine…

The markets continue to rage back and forth like never before, and obvious trades like shorting low-grade debt are stamped out in a moment by the latest, unprecedented Fed actions adding to the difficulty of this market. I discussed placing some limit put orders in an effort to go long silver at the beginning of the month and that those orders went unfilled. To clarify, I was looking at entering either SIL or SLVP, both silver ETFs. What I have ended with is a spread of options on CDE, Coeur Mining, Inc.

Coeur is a holding in both ETFs. It is a Junior gold and silver miner with holding primarily in the US but also in Mexico and Canada. I have gone long the security by selling the $8 put with a 9/2020 expiry. The option premium was $4.83. I used $0.45 of the proceeds to buy $2 puts with the same expiry, just to hedge away the last loss. So if I have to buy the shares at $8, they will only have cost me $3.62 each [$8 – $4.83 + $0.45 = $3.62]. The spot price was $3.13. I received a large payment of $4.38 net cash per share, have only $1.62 of value at risk per share, and have exposure to this security issue’s upside if elements of the current macro trend play out as expected.

The big-ticket macro features that I expect will impact this trade are not limited to my thesis about the gap up in silver prices. CDE will also benefit from the expected rise in gold value. And maybe most exciting and least considered is the potential impact that low fuel costs are going to have on the extraction price for metals. I expect these gold and silver miners to be printing money like the New York Fed before the end of the third quarter. Timing is always difficult though and it is possible that price discovery won’t have manifested in the stock price before my options expire.

I am also very cautious about what is happening with the dollar. I, like many, continue to expect a strong and probably rising dollar across this option period. A really strong dollar may be too much headwind for metals prices. Another risk is liquidity selling. If people just need money to live and must start selling their gold stash to stay afloat, increased selling pressure could serve to keep a lid on some of the crazy gains that would otherwise manifest.

I have re-visited this trade today during the trading session and it looks still available. There have been a few analyst actions on CDE since I initiated the trade. On April 14th Canaccord downgraded CDE from buy to hold with a $3.50 price target. B. Riley has maintained its buy recommendation and raised its price target from $11 to $13. Consensus estimate is about $6. The Q1 earnings call is scheduled for April 22nd. I will be excited to hear guidance and see first quarter performance.

Though I only took a pretty small position, I did not expand it today. I continue to approach the market and risk management with extreme care. This is a speculative trade, and investors should do their own research. I would welcome feedback on this trade an thank you for your attention.