Pan American Silver Corp.: Jim Simons Invests $20.4 Million

Jim Simons Shares Pan AmericanWhen celebrity investors like Jim Simons buy a stock, the market follows; pushing the stock higher and forcing average investors to pay a higher price. But Pan American Silver Corp. (NASDAQ/PAAS) dropped by more than five percent on Tuesday, July 7th, meaning that everyone can buy this valuable miner for about the same price as Simons. (Source: SEC Filings, July 7, 2015.)

Simons runs one of the most successful hedge funds in the world—Renaissance Technologies. The “Quant King,” as he’s known, was one of the first on Wall Street to embrace electronic trading. That’s probably because Simons is a mathematical genius, having attended MIT before working as a code breaker during the Vietnam War. (Source: Forbes, May 13, 2015.)

Tucked away in Renaissance’s 13-F SEC filing was a five percent bump in their holdings of Pan American Silver. They now own 2,332,900 shares, valued at $20.5 million. What’s behind their big bet on silver?

Let’s take a look.

Headwinds for Silver

Shares of Pan American Silver nearly halved in the last 12 months, falling from $15.61 to $8.08. You’re not going to get rich overnight, but picking up shares at this huge discount could be a huge win under the right market conditions.

Both gold and silver have been on a steady decline in recent years thanks to the constant money printing from the Federal Reserve. The central bank has continuously pumped new money into the financial system, artificially inflating stock prices.

Investors usually flock to precious metals in times of panic, but quantitative easing and rock bottom interest rates have distorted those impulses. Markets are turning a blind eye to any signs of impending doom, choosing blind optimism instead.

A lot of American commentators are reprimanding Chinese investors for their over-enthusiastic bull market run. They have absolutely no self-awareness. In the last five years, the S&P 500 and the Dow Jones Industrial Average have grown 93.14% and 73.89%, respectively. The NASDAQ climbed 126.23%.

The American bull market has not reflected the underlying weakness of the American economy. The Hires rate has been trending lower for some time, yet the Quits rate is higher. People are leaving their jobs even though there are fewer employment prospects in the market. That looks like a lot of unwarranted optimism to me. (Source: Economic Policy Institute, June 9, 2015.)

Wait for the Fear

Sooner or later, optimism runs out. Reality catches up with the market and valuations take a conservative turn.

The Volatility Index, or VIX, is a measure of how much fear is in the market. Every time investors start feeling uneasy, the metric spikes. The chart shows panic building as we reached the end of 2014, but the market regained optimism by early February. (Source: Chicago Board Options Exchange, July 7, 2015.)

volatility index chart

It was a hard winter and seasonal effects dragged down first quarter results. When those results came out in April, the VIX bottomed out and spiked in May. But why did the index drop in June?

Let’s do a little recap of what happened in June. Negotiations between Greece and its creditors fell apart, ending with a Greek default. European markets readied themselves for Greece to exit the eurozone. And China’s stock market crashed by over 20%.

Given those developments, why were investors feeling so confident? The answer seems to lie with the Federal Reserve’s decision not to raise interest rates. Chairwoman Janet Yellen gave a speech that hinted at a future rate rise, but kept the monetary stimulus in place for now, and markets transformed that tidbit of information into optimism.

A Crash is Coming

The share price of Pan American is directly tied to the price of silver. Its last peak was $41.21 in December 2010, when spot prices for silver were nearly double what they are today.

If silver prices make a big move to the upside, miners like Pan American and Silver Wheaton Corp. won’t be far behind. But a stock market selloff needs to take place in order for that to become a reality.