Trade of 2010 - Long Silver, Short Treasuries
I noted the following on January 10 in a Words from the Wise review: "Will we perhaps look back at these assets [referring to bonds and silver] a year from now and see one of the worst and one of the top performers respectively for 2010? A long silver, short Treasuries trade makes perfect sense to me."
I have on a number of occasions since highlighted bearish articles on Treasuries and bullish articles on gold. Although I have not recently written anything specifically about silver, I regard silver as gold's high-beta cousin, with a very favorable set of demand/supply statistics to boot.
How has this "Trade of the Year" performed since the beginning of 2010? Let's turn to the scoreboard: The year-to-date returns show silver (+68.1%) clobbering 10-year Treasury Notes (+5.6%), although the Treasury short position on its own is under water. The relative strength of silver versus the price of Treasuries is shown in the bottom portion of the chart below. A rising trend line indicates silver outperforming Treasuries, whereas a declining line shows the opposite. After a ranging ratio for a few months, silver has turned the tables from late August onwards.
Source: StockCharts.com
Just in case you are wondering whether this is all theory, the trade I actually recommended in practice at the time of mooting the idea opted for a somewhat more aggressive strategy, buying leveraged (2x) ETFs, namely the ProShares Ultra Silver ETF (AGQ) and the ProShares UltraShort 20+ Year Treasury Bond ETF (TBT). The results of the geared trade are shown in the graph below, reflecting AGQ up by 140.3% and TBT down by 23.4% since the start of 2010.
Is it too late to still do this trade? Probably not, but given the strong rise in yields over the past few days and the earlier surge in the silver price, it is advisable to build the position in increments whenever markets correct.
I will be suggesting a fresh trade of the year for 20111 early in the new year, but in the meantime show below how various asset classes have performed for the 2010 year to date. Silver finds itself close to the top, whereas government bonds lie close to the rear end. My new trade may very well be to go long of a laggard and short of an instrument in the top section (or perhaps something not even on this chart).
Source: Finviz,
December 8, 2010.
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
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