The Historian

An Interview with Thomas Kaplan

OR: Is that because you remain a historian at heart?

Kaplan: Well, it’s certainly been my relative advantage to be able to see our markets through the prism of history. It helps me to visualize what the target will look like years hence -- and what needs to happen to our thesis for us to get there. I’d love to have a trader’s talent, but it’s not in my DNA.

OR: That doesn’t seem to have hurt your performance. Eighty percent compounded annually since 1994 is a great track record. And it hasn’t simply been in one commodity: you’ve had success with silver, then platinum, then energy, and then gold. How do you decide the sector on which to focus?

Kaplan: I look for resources where the supply-demand fundamentals are improving markedly, and yet where John Templeton’s concept of maximum pessimism is the prevailing sentiment. In the 1990s, that trade for me was silver. Having fallen from $50 per ounce to $3.50, and tainted by the Hunt debacle, silver was extremely misunderstood. The zeitgeist was that it was finished and had much more to go on the downside as digital would supplant silver halide film. I felt that the investment community didn’t understand the data and that the supply-demand equation argued more vigorously for silver to someday return to $50 than the $2 generally predicted. Armed with that conviction, the opportunity to buy silver assets to gain leverage to this prediction was extremely tempting and, despite having no background in engineering or geology, I created a silver mining company, Apex Silver. Fortunately, it is a truism that bear markets unearth not only great buying opportunities, but also great talent: I was able to assemble a fine management team to take advantage of the disarray in the sector. Similarly, when oil was trading under $20 a barrel a decade later, and the prevailing view was that prices would likely recede, I felt the data was misunderstood and created an energy company, Leor Energy, as a means to play a move toward my $100 target.

OR: Did you know anything about energy exploration?

Kaplan: Nothing, really. But my thesis on silver exploration had worked out well. I also felt my experience at Apex was fungible, and that I knew how to create a vehicle from scratch. Also, I was feeling lucky.

OR: Had you also changed your mind on gold at this point?

Kaplan: Yes, I had. In 2001, Dr. Larry Buchanan, the discoverer of Apex’s San Cristobal silver property in Bolivia, and I had started a gold exploration company. Gold was around $300 per ounce at the time. When the Bank of England dumped its gold -- the “Gordon Brown Bottom,” as we called it -- it seemed a classic capitulation and I added gold to my focus on silver. Electrum, a naturally occurring alloy of gold and silver, seemed the perfect name and so we began the branding under that label.

OR: Other than what you saw as a selling climax, were there fundamental reasons for your renewed interest in gold?

Kaplan: Yes. As with silver years earlier, the simple supply-demand equation for gold had become very favorable.

OR: When you sold Leor Energy in 2007, it was one of the fastest-growing privately held companies in the space. What made you sell it and go all-in on precious metals?

Kaplan: Beginning in 2007 I began to feel that things were too good for the world in general -- and my family in particular. We had a 100x return in energy, and also in platinum, on paper. I decided it was time to ring the cash register on those commodities, which were dependent on industrial demand, and to pivot to an under-owned currency: gold. I felt that if the world continued to do well, gold would do well. After all, it had multiplied off its lows without crisis. But I also began to suspect that if I were right and the good times were indeed simply too good, gold might be the only thing that would do well in a severe downturn.

OR: You sold your oil and gas company in 2007 when oil was at $120 and moved into gold at $650 per ounce. Now that oil is in the $50s and gold is at $1,200, has your view changed on these assets?

Kaplan: Nothing that caused me in 2007 to view oil and gas as vulnerable commodities and gold and silver as under-owned currencies has been altered by the subsequent price action or macro environment. On the contrary. If anything, between the collapse in hydrocarbons and the whirring of the central banks’ printing presses, I'm experiencing what psychologists would call positive reinforcement.

OR: Are you tempted to buy oil now?

Kaplan: Not really. Oil could be worth $20 or it could be worth $120. I simply don't feel that I know, and I need conviction to play. If the global economy should ever be allowed to correct its excesses, oil could collapse further. Or the Saudis may decide they don't have the stamina to crush American shale and Tehran after all and turn the switches back off. There are too many exogenous factors that can affect commodities, whereas the supply-demand equation is so much more obvious to me with the monetary metals.

OR: Does it surprise you that gold has held in against a rising dollar as much as it has?

Kaplan: Gold is shrouded in myths. Along with the myth that gold is simply a commodity is another: that gold needs a weaker dollar to thrive. The dollar was far weaker in late 2007 than it is today. So if I had told someone that oil could go from $120 to $50 or lower at a time when gold had doubled, they’d have said I was delusional. But if I added that the dollar could go from $1.45 to the euro to $1.10 while gold surged, I’d have been locked up. The market loves myths.

OR: Any other myths we're missing?

Kaplan: Actually, there is one: that gold needs inflation to thrive. Gold is up 500 percent from its lows against the dollar. Yet I cannot remember a time during the last 15 years when inflation was a big deal in the West. It certainly isn’t these days. In fact, if there is one word that seems to define this era, it is deflation. And yet gold is performing quite well.