Ever Been Up 87% In Two Days? - UPDATED

Today I take a bit of a departure from the normal anguish over precious metals, but I hope you'll see at least some relevance in this post to much of what goes on in the silverogosphere on a daily basis.

Silver bugs on-line (and some of their yellow metal cousins) often seem to fantasise about waking up one morning and finding that their investment has jumped in such an extraordinary way that they're suddenly rich. Early retirement beckons, two fingers (or one, if you're from the wrong side of the Pond) are raised to bosses, and a Ferrari catalogue is casually ordered. Or an extra-nice hat is window-shopped, if you're me. I have to admit that I lead quite a simple life, what with being locked in GM's basement and all...

Anyway, the extraordinary thing is that exactly that happened to me yesterday. I hadn't ever imagined it would transpire, but it did. Do you want to know what a chart of your favourite silver fantasy looks like? Because I've got one right here for you:

As you can see, the spot price of silver fumbled around the 31 - 32.50 mark for a few days, before Wednesday's incredible action, in which it rose a full 50% in one day. It managed another 16% today, making the total move from Wednesday open to Thursday close an incredible 87%.

For me, the best part is not so much the instant massive wealth, nor is it the thrill that came from coming home to see all my dreams come true. No, it was being right. After all those years of being the silverogosphere's #1 silverbug (what?!), I was finally proved right. Who knows what lofty heights we'll reach from here!

Alright, alright. I've not been smoking Warren's slippers again. I admit, this isn't a chart of silver, and I did change the numbers (but the scale and timeline are absolutely correct). This really happened, and it's a genuine plus-fifty-percent-in-one day-er and 87%-in-two day-er. It's Borders and Southern Petroleum (LSE:BOR), an oil and gas explorer that has the rights to an exploration zone to the south of the Falkland Islands. Here's the proof from Wednesday's action - I just had to get a screen grab of it:

And yes, as of the FTSE close two hours ago, it really had risen 87% in two days (to 129 BPC at its Thursday peak). It seems to have been driven by rumours (i.e. a leak from returning rig crewmen, no doubt in one of Stanley's six pubs) of a big oil find, and the anticipation of an announcement any day now from the company. It is therefore a move based on fundamentals rather than technicals (even if the leak is utter rubbish, it's still a fundamentals move, albeit one based on bad information).

It's an obscure example to be sure, but I got the screen grab because I was lucky enough to have a position, which I'd established about a month ago. Sadly, it was a small position, so even with the big rise I won't be ordering any Ferrari's any time soon (although I could probably just about manage a new hat), and I'd only put it on as a creative hedge to another trade. I was just really lucky in other words - no credit to me, no amazing insight - just pure, unadulterated luck. Screwtape isn't Jessé's Cafe Américan - I'm not here to tell you about those perfect trades that I'd neglected to mention up until the day after a big move... ;-)

The hope

So what does Borders and Southern Petroleum mean for silver? Not a lot at first sight, but quite a lot when one thinks a bit more deeply about it. Basically, this chart is what many silver bugs think is going to happen to them. They imagine buying at what are in retrospect (hopefully) insanely low prices, and then in a matter of days or weeks, hitting the jackpot. The chart above is proof that it can happen. It's never happened to me before (tant pis), but KD or others could probably give you hundreds of examples of this kind of thing. So the idea that silver could/will make a similar move based on fundamentals is not an impossibility. BOR is undergoing accelerated price discovery as we speak, and those who bought in at the right time (the 'smart money') have/will make a killing.

However, I've deliberately created a straw man argument there. Because silver's anticipated moonshot is not based on fundamentals at all. Brian O'Flanagan effectively demolished that idea in a post here. Rather, the silverbugs' idea is that a short squeeze will propel silver to new and fantastic highs. Well, good luck with that, as the short/long imbalance is nowhere near where one would hope to be for such a move (and the possibility that bullion banks are in fact net long is credible, and is my own personal view). So silver bugs are sat waiting around for a technical move that has no technical basis.

The despair

The only hope for silver, therefore, is that rumour and pumping can fill the space where technicals and fundamentals are absent. This went in spades last spring, as what I'm now tempted to term 'the Wynter Benton/Sprott pump and dump of 2011' ran its glorious, then its inglorious, course, and devoted readers of the silverogosphere were brainwashed into withdrawing money from their 401ks and maxing out their credit cards. They then found themselves sitting on a stash of $49 silver now valued at $31.80. Reading the silverogosphere now, as is my wont, it feels like a new pump is waiting in the wings. Those who bought at $26 - 28 will almost certainly be fine. But I pity the future naive retail investor sucked into the hype in (say, hypothetically) June - September 2012 who decides to go all in at $42.

Which brings me back to Borders and Southern Petroleum. No oil find has been announced. Now, a move like this over a two-day period is unlikely to be based on nothing. However, the move is so far entirely based on rumour, and one has to ask what possible kind of oil/gas find could justify a price discovery of 87% higher than where the share price was two days ago. My personal feeling is that almost nothing could live up to such expectations, unless they've discovered that the seabed of the Falklands' Economic Exclusion Zone is in fact made of diamonds. In other words, almost regardless of whether the company's report over the next few days leads to a dry gulch or an oil-rich paradise, the speculative interest could easily sell on the news either way.

Those retail investors (many of whom are from the Falklands themselves) who bought at 62 BPC recently will kick themselves for being stupid by not selling at the highs, and losing some of their potential profits. Oh well, no biggie. Such is life. But those who bought at 124 BPC will feel suicidal as they try to explain to their spouses and kids what happened. It's Wynter Benton writ large in South Atlantic oil. But the basic facts of trading are that almost nothing moves 87% in two days without some painful payback for the greater fool who bought at the top. Of course, no-one knows where the top will be, so it's impossible to call. For BOR it might be at 250, for all I know. We could also very easily be there, as the company report might be out tomorrow or Monday morning, and it will most likely disappoint regardless of whether or not it's positive.

For me, if you're interested (doubtful, I know), I had the luxury of getting in at 68 BPC, so at the close today I sold a number of shares exactly equal to the cash equivalent of my initial investment. I'll now sit back and watch how this plays out, knowing that all I can lose are profits. It's called capital protection and risk aversion, and you'll be lucky to find a dyed-in-the-wool silverogosphere host who ever mentions these concepts. But they're important for BOR's big find, and they're no less important for silver.

To conclude

So we're neatly back to silver. Be careful what you wish for. The last pump and dump created a bubble that cleaned many out. A new generation of amateur silver investors/Ferrari enthusiasts will, I can almost guarantee, get sucked into the next pump, whether it be this year, next year or in five years. Many will be recruited by repeated encouragement to conjure up a mental image of what is in effect my first chart in this post.

Beware. The chart certainly isn't a fantasy, as BOR shows. But 999 times out of a thousand, it is. And it's certainly not the pumpers who'll pay the price if and when it all goes wrong.

[UPDATE: Fri 20 April 2012: The share price of BOR continued to go up today, hitting a peak at 135 BPC. I sold the rest of my shares at 127 BPC - this game was getting way too rich for my blood, as I explain in a comment to this post, below. Those who are left - good luck to you. But I think you're mad. Nothing moves nearly 100% in three days without some serious pay-back.]

[UPDATE 2: Mon 23 April 2012: And so, with the sad inevitability of this car-crash waiting to happen, BOR announced its findings today. Not so much an oil field, but rather just the first signs of potential gas deposits. Much more analysis needs to be done. With a massive find already priced in, there was only one way this stock was going to go today, and the shorts were not disappointed: BOR closed 31.6% down on the day (and 33.4% down from its Friday high, when the smart money exited). There'll be a lot of dejected faces on the Falkland Islands this week.

Of course, the price may well recover - over time - and retail investors' losses recouped. But the irony is that such a massive move in any stock in such a short time is far from positive news, despite the initial excitement. Once it inevitably falls back, the stock is left with a structural short: i.e. any rallies will be sold by those who bought in at too high a price. It has the effect of killing the stock for some considerable time, regardless of the underlying fundamentals.

It is, in fact, exactly what we've seen happening in silver since May 2011. A cautionary tale indeed...]

[UPDATE 3: Wed 24 Oct 2012: For those who are interested, the current share price of BOR is 23.50 BPC. That is a fall of 575% from the high of 135 BPC. Ouch.]


Louis Cypher said...

Curiosity is killing me... why did you pick that particular company?

Warren James said...

I am guilty of this kind of thinking - at least in 2011. Much to my chagrin, 'true price discovery' typically meant "price goes to the moon after I have established my position, okay-I'm ready-now-thanks-go-go-go-whats-the-holdup".

My education is now a lot more rounded ;p

mr pinnion said...

I find it hard to believe there wont be another run up in the price of silver this year.
Which makes me think there probably wont be one.


Anonymous said...

@Louis: Quite a few reasons. The first is that, unknown to many, my first interests in trading were in the oil sectors. It was only later I moved into gold/silver.

But I still play around with oil a bit, and I've been experimenting with 'senior' vs 'junior' stocks, with one hedging the other. I also know a fair bit about the Falklands, and I've invested on and off in four of the explorers that are operating there. I believe they have great long-term potential, but was never expecting a sudden move in BOR like this! Hence I've now gone all cash in all my Falklands equities, until we get some clarity on what will happen next.

If it goes to the moon, and I lose out on the Ferrari, I'm really happy for those who held. But I'm feeling pretty risk averse at the moment, and we're currently not far from a 100% move in BOR over three days, all based on a rumour. And that's too rich for my blood...

Anonymous said...

Oh, and another reason I took all my profits on Friday and went all cash is that BOR failed my "credit card test". This is a metric that I've used before, and to which I force myself to strictly adhere.

Basically, the rule is that as soon as the first person shows up on a bulletin board (during a massive move in a commodity/equity/whatever) and starts talking about using a credit card to buy more of the stock, because it's a no-brainer that he'll be able to just sell it next week/month for a massive profit and pay off the debt, well, that's when it's time to get out.

It was honestly this metric that made me bail from silver in April 2011 - I read a comment on Turd's site from someone who had done exactly that. The following comment not only congratulated the poor sod for having done so, but encouraged other readers to do the same thing. I emptied my GoldMoney silver holding that same day.

On Friday, I read a startlingly similar post on a bulletin board about BOR, and promptly tottered off to log in to my brokerage account...