Move over Nasdaq…Bitcoin…please. Boring, 1000’s of years old as a store of value, Silver has been making the rounds this week, shooting up about 15% this week (it’s Wednesday).
— Soleil Du Soir (@soleil_dusoir9) July 22, 2020
What’s more? Gold’s boring cousin Silver has rallied about 100% since the March lows (compared with Gold up 27%). What’s going on – did Silver become a SAAS company in search of a ludicrous P/E multiple? No. This is overflow and unintended (or maybe intended) consequences of printing all that money for Corona Virus relief. A bet against the dollar. A bet on inflation (someday). Or, a bet on Gold without buying Gold – getting much of the benefit without the high cost.
But, we’re more interested in the trend following impact here. Because, who in their right mind would ever buy this asset looking back 10 years? A value investor/falling knife catcher of the stoutest resolve?
No, the better bet for what type of riverboat gambler would go long this plummeting chart is not a gambler at all. It’s a systematic trend follower who doesn’t care if the asset has never had a positive year in its existence! They don’t care because they look for asymmetric bets which payoff when outlier moves happen in either direction. In the case of Silver, trend following models have been buying EVERY breakout for the past 10 years. Here’s a look from SocGen’s Trend Indicator website:
That’s 18 different times in the past 9 years that this basic trend following model has gone long. And all but one of them have been losing trades. That’s a solid 0.05 batting average. Not exactly Ted Williams hall of fame material here. Which begs the question… Why? Why keep that market in the portfolio? Why keep bashing your head against the proverbial (silver) wall. There’s likely all sorts of mathematical answers guys like Corey Hoffstein or Eric Crittenden could tell you. But the common sense answer is because you never know when the next big outlier move is going to happen. You never know when the next swing is a home run. And, to keep the baseball analogy alive – the strike out is barely an out at all. It is infinitely less punitive in terms of game theory than 1 of the 3 outs you get in baseball. Assuming a risk per trade of 0.25%, this game has 400 outs – making a strikeout rather immaterial.
But you still go to the plate – because this happens – where Silver rallied 80%+ in 2010, returning 10x that initial 0.25% risk. Now, add 40 to 80 more markets across energies, currencies, interest rates, equities, agriculture, and more – and you see the game trend following is playing.
P.S. – We found this nice chart of commodity returns on Visual Capitalist showing the wild (mostly down ride in silver as compared with other commodities).
P.P.S. – Palladium sure has been a standout at the top of this table for the past decade.