Octavian Report: You’re one of the gold sector’s most ardent proponents. In a world that seems to want to punish gold bulls, how does it feel being a contrarian?
Thomas Kaplan: While I’ve taken positions on occasion that are contrary -- sometimes very contrary -- to prevailing sentiment, I’ve never thought of myself as a contrarian. As a philosophy of life, it suggests being a disagreeable person simply for its own sake. Who wants to wake up in the morning with a cynical outlook towards your fellow man? It seems to me neither a pleasant way to live, nor a particularly rational way to go about making investment decisions. To take a stance against an established trend simply because the sentiment is skewed towards it is not a strategy. We know from history that trends can last a long time and that the crowd can be right for long periods of time. In other words, as we’ve seen from many famous short positions that blew up the participants, to be reflexively contrarian can be very unrewarding. The key, I believe, is to determine when the fundamentals have changed sufficiently enough that you discern that the trend is overshooting and can reverse. The prerequisite here is not simply to be contrarian per se, but to believe the crowd is now getting it wrong. That’s a big difference. If you genuinely, dispassionately believe that the fundamentals have changed in your favor, and that the market’s disagreement with your thesis allows you to take a position at great price levels as a result, you’re not a contrarian so much as lucky to be able to avail yourself of a great risk/reward opportunity: what Warren Buffett would call “the fat pitch.” If you can connect with that fat pitch, and if you’ve done your homework, eventually -- when the the crowd agrees with you -- you will enjoy the biggest rewards.
OR: So being a gold bug today is a purely rational decision?
Kaplan: The short answer is yes; stripping emotion out of the equation, there are many rational and quite positive reasons to own gold. I will, however, confess that the negative sentiment is really assisting us at the moment as we seek to build more positions.
But tell me -- is there another area of the market where being a bull categorizes you as an insect? I’m not insulted by the expression, and indeed I find it encouraging that people use it. Great trends are born and sustained out of such derision and skepticism. And if there’s one thing we know, it’s that gold qualifies by this standard in today’s world. It is the asset that people love to hate and hate to love. I’ll go further than that: to be a gold bull today can literally harm one’s career. The best-performing financial asset in the world over the last decade is so despised that to express bullishness regarding its future path is to take a career risk. I have seen people who are -- and remain -- genuinely bullish recede from their public views because they think association with gold can taint their reputations. Not for me, perhaps, because natural resources are our family business, and the dozen or so of us that still exist in our space are used to being considered outliers in the investment world. But for a generalist fund manager it can take great courage to be -- how shall I put it? -- open-minded.
OR: Surely that’s bullish?
Kaplan: Of course it is. You don’t have to be a contrarian to welcome or even love such anecdotal indictors. Negative extremes in sentiment, as we know, are often a hugely bullish sign that those who are going to sell have already done so -- or will be flushed out soon -- and that those who might be buyers haven’t built their positions yet. Moreover, because markets are partially driven by such dramatic sentiment, it enables one to seize great assets at valuations that in retrospect will appear ridiculous.
OR: Did you start your career being a bull on gold?
Kaplan: Actually, I didn’t. In fact, when I started to invest in natural resources more than two decades ago, I didn’t have a particularly positive view on gold. My focus was on silver, which was then trading at below $4 an ounce, and on which I was hugely bullish. To those who asked at the time if I was also bullish on gold, my response was that I didn’t see any reason to buy gold that wasn’t multiplied for silver -- so why bother?
OR: Why was that?
Kaplan: To me, gold is basically a monetary metal. Silver is a monetary metal as well. In fact, as Milton Friedman put it, the major monetary metal throughout history has not been gold, but silver. But silver is also an industrial metal with unique physical properties. It has literally hundreds of applications that make it extraordinarily useful. So in the 1990s, to me it seemed logical to focus on the metal that had not one, but two personalities. In a gold bull market, silver would behave like gold on steroids and, in a bullish commodity environment, silver would outperform gold due to industrial demand.
OR: So do you prefer silver to gold?
Kaplan: One should own them both. But people need to understand that, to own silver, one has to accept the consequences of its attributes. As an industrial metal, silver can initially underperform gold during the kind of financial crises or economic downturns that can hit commodities and favor gold. We saw that during the last crisis. Nonetheless, when gold really kicks in, silver tends to recover from its industrial slump and ultimately outperform gold as the more leveraged of the two metals to financial considerations -- and the fact that the industrial buyers still need to go into the market to buy it. So silver is inherently more volatile than gold. Hence the expression “gold on steroids,” and hence why I like them both. Having said that, this bifurcated approach is much more suited to a longer-term investment philosophy than a trading mentality, which is a trait that I do not possess.
Thomas Kaplan is the chairman of the Electrum group of companies, a New York City-based investment and asset management firm with a focus on precious metals.