Trade of 2010 – long silver, short Treasuries

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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).

Click here or on the image below for larger view.

Source: Finviz, December 8, 2010.

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