Shorting The Index

I talked in

Money For Nothing
Monish Pabrai has a quote in his book Dhando Investor I really like: “Heads I win; tails I don’t lose much.” The idea here is to think about your upside potential and compare it to the downside risk. Realize that these are often not related. Sure, investments with more upside

about how the GDXJ index is a great short to pair with your long S&P500 or long royalty companies.

Then recently I was looking at the silver ETFs SIL and SILJ as great short hedging, but I realized that SIL has 24.41% allocation to Wheaton Precious, a royalty company. Also another 2.42% to Triple Flag, another royalty company.

A quick look shows that WPM is +164% in the last 5 years, while SIL is +2.74%. I don't have historical allocation data for SIL, but if the weighting to WPM was similar to the current 24.41% it would figure SIL should be +40.03% from it's WPM holding alone. That would make the 5 year ex WPM returns -37.29%.  

Umm, that's a better short than the GDXJ.

On the other hand, I'd like to be short GROY or FISH, unprofitable royalty companies. I'd also like to be long quality miners like SSRM (SSR Mining) or LUG (Lundin Gold).

Let's look at a few approaches we could use

Offset Long Through Cycle Profitability

SSR Mining has produced a profit every year since 2016. For your short to work you need the company to lose money in bad years. Go long SSRM 2.79% of your GDXJ short to offset.

This also lets you be short some royalty companies like GROY that still are in the red earnings wise, while being long companies like Triple Flag that produce a profit.

Offset Long First Quartile AISC

Lunding Gold from 2013-2019. In 2020 they had negative earnings as they were ramping production. Since 2021 they have gushed profits.  Through cycle profitability is a retroactive measure and they haven't been around long enough yet.  But this is clearly a money making operation.

In 2016 they came out with a feasability study with an AISC of $623/oz. At that point I'd argue you don't want to be short.

Offset Long Tier 1 Discoveries

Pre-revenue companies are as a class really good shorts because they have to continually raise more money at below market prices. However, there are some outliers in there.

Here we starting getting squishy. But Filo is pre-revenue and I wouldn't want to be short. Once they drilled a discovery hole that showed it was a Tier 1 deposit it probably is a good idea to not be short.

Offset Long Anything You Like

I like Marathon Gold, they are 0.13% of the GDXJ. At some point there are diminishing returns bothering to take tiny positions to offset immaterial components of the index. There's also trading costs to consider.


The question then is why not just short the bad stuff from the indexes? The answer is that shorting the ETFs has very low borrow costs, while shorting most of the companies in the index have high borrow costs or no availability at all. All of the ETFs have basically infinite availability to short at low borrow costs.  How ideal, at least if we remove the few quality names they inconveniently put in.