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Over the last two decades you have had success navigating your way through natural resources, moving from silver to platinum and energy, and then back to precious metals. How do you decide the sector in which to focus?
Dr. Kaplan: I approach natural resources investing through the prism of history and cycles, and tend to look for sectors where the supply/demand fundamentals are improving markedly, yet where, as John Templeton put it, “maximum pessimism” is the prevailing sentiment. I felt that way when silver was trading at $3.50 per ounce in the early 1990s, down from $50 per ounce during the Bunker Hunt years. To take advantage of the disarray in the sector, I started a silver mining company. For the few of us who had the conviction to focus on silver mining, it was a very contrarian move. At that time, the consensus was that the silver market would be destroyed by digital photography and that silver was headed to $2 per ounce. We felt that the facts argued more for a move back into double digits. Similarly, when oil in the early 2000s was trading under $20 a barrel and the prevailing view was that prices would fall, I felt oil could rise to $100 a barrel, and created an energy exploration company as a means to play that forecast.
When you sold your natural gas company Leor Energy in 2007, it was one of the fastest-growing privately held companies in the space. Why did you sell it to focus on precious metals?
Dr. Kaplan: There were currents in the global nancial system that did not feel quite right to me in early 2007. Having made many times our money in both platinum and energy, I felt the time was right to book our pro ts and shift from economically sensitive commodities such as these to the world’s most reliable currency: gold. I felt that if the world continued to do well, gold would be ne. But if, as I believed, the good times were simply too good, gold would be among the few assets that would perform during a severe downturn.
So your motivation was fear?
Dr. Kaplan: Actually not. I don’t believe in buying gold because of the fear factors. I prefer Economics 101. Gold is the only currency with a multi-millennial provenance that can’t be debased. So when debasement is the order of the day, be it through uncontrolled spending or now de cit spending plus money printing, one should own some. There’s so little of it to go around, however. Now the o cial sector, central banks, have gone from net sellers to net buyers and the Indians and Chinese are competing to be the largest consumers. That should be enough on its own merit to want to own a bit of gold. But when we also see what’s happening in the gold mining industry itself, one can see a systemic supply/demand disequilibrium looming. By and large, the miners are producing gold faster than they can replenish their reserves. Some are high-grading. And there haven’t been big new discoveries in several years. It’s really an attractive picture, without resorting to gold being a hedge against political instability, rampant in ation, depression, or any other plague. Buying gold is eminently rational. The fact that it’s hated, despite its excellent track record since the last tech bubble, is quite a classic phenomenon.
How did your pivot from energy to gold work out?
Dr. Kaplan: Pretty well. When we sold Leor Energy, the price of oil was over $100 per barrel and natural gas was trading around $7-8 per million BTU. Gold was trading around $650 per ounce. As I write, gold is trading at close to double that price. And oil and gas has collapsed. I should add that the Dow Jones Industrials Average (DJIA) has only risen by 30-40 percent since then.
So gold has proven that it isn’t a commodity?
Dr. Kaplan: Yes. It really is a currency. Again, that’s an incredibly important distinction. It explains why gold performed so well during the nancial crisis and beyond. I expect that phenomenon to continue over the long term.
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