Monday, April 4, 2011

The Next Big Short

An interesting Blog Post on the parabolic rise in Silver and to some extent, in, Gold.

In 2001, the bubble in tech stocks burst. In 2008, Hedge Fund Manager bet that the sub prime market was going to crash. He was correct, big time. The bubble getting formed in Silver and Gold may qualify as a similar short. The reasons are:


1.Explosive & exponential gains (>400% gains w/Gold & >700% gains w/Silver since 2002)

2.General public participation
3.Everyone's a winner

4.People who did not participate before - participate now (insert your personal anecdote here)

5."This time is different" syndrome (the financial system is broken, therefore...)

This trade is no different than Paulson's short on the housing sector - or Buffet's short on the dollar. They did their due diligence - recognized an asset class that was so historically stretched in relation to the mean and waited for their ship to come in. It is most similar to the Paulson trade - because everyone believed that the housing market was infallible to the kind of declines Paulson recognized as inevitable.

Today, everyone believes the inverse relationship to be true. That the financial system is broken, that the Fed has lost control and that Islamic Jihadists or a Middle Eastern state(s) will bring us to our knees. While there is some truthiness in shades of that - it's more hyperbole than reality.

It was the confluence of the Tech Bubble bursting in 2000, the events of 9/11 and a commodity sector that was overdue for outperformance - that gave birth to this bubble. As with every bubble - it starts with a legitimate thesis for outperformance - and then runs away with emotion. It is only after we reach the dizzying heights of the sun that we realize the danger we so confidently embraced.

That moment seems imminent.



Pi said...

My view -

For gold & silver to make tops and make dramatic fall (and no doubt which will happen, and within next 3 months) we must first have increase in volatility. Trends with low volatility typically tend to continue on after short corrections. In the last stages, volatility increases a lot, with big big days on either side.

I would say gold & silver have just started this last phase where volatility dramatically increases, as we have seen in the last 10 days in both gold/silver. Thus this is the beginning of the last phase, difficult to say when it could top out. But fact is also that this phase will bring very very outsized gains, so be patient if looking to short, else market will tear you apart.

Also, with a big upside move in euro & downside move in dollar index imminent, we should first see big upside breakouts in both gold & silver..

Actually this breakdown in dollar also has implications for us as it could mean a wall of global liquidity flooding all global markets and rising asset prices all around.

So first trade these market on the long side.. But we should definately see dramatic falls in both gold & silver (silver could fall by 30-40% in a single month),but that should be atleast a couple of months away, and atleast much more bullishness on the part of retail investors.. i dont see such enthusiasm around me here in India atleast..

men said...

Today ITC has made a new life time high, and going by your theory a stock making a new high is a buy on declines then does this qualify? Secondly how to identify a top is in place any guidelines?
Thanking you.

Pi said...

I know you dont comment on individual stocks per se. But can you please have a look at polaris, and talk about the nature of the breakout. According to you, how would rate the breakout in terms of strength and probability of follow through.

Debi Mishra said...

I think the window is as small as 10 years then Silver and Gold journey look as if it is parabolic.It will be different for someone who looks for a 40 yr chart.He will be expecting beyond its all time high and cross $50 . Do you agree??? Berkshire stock has underperformed Gold a lot in last 10 years. Actually Buffet has missed this rally.