$50 Silver: Bubble or New Norm?

I know there is a big split on this board: Half think $50 silver is a bubble and will soon pop -- the other half think $50 silver is here to stay and silver is ultimately heading higher.

I think the top 3 arguments I've heard for a Bubble are:

1. Last time silver hit $50 in 1980 it was a bubble, just look what happened after that.
2. Silver has tripled from $16 to $48 in 6 months, that's a "too far, too fast" climb.
3. We all got used to Silver between $4 and $8, it sat there for 20 years between 1981 and 2001, so that must be the "normal, fair market" price.

I think the top 3 arguments I've heard for the New Norm are:

1. Too Low Interest Rates and Rampant Money Printing have finally caught up with us (and Bernanke wants the dollar to go lower).
2. People and Governments are diversifying away from the Dollar and buying gold and silver.
3. The inflation adjusted 1980 price for silver is really between $128 and $328 (depending on how you measure inflation) an ounce, so there is a lot of room to run.



I've started trying to analyze the situation to determine how I should position myself in my retirement investments. I am a firm believer in higher silver prices in the future (which I think will push over $100 an ounce in a few years) -- but I also think silver has run too far, too fast in the short term and needs a good pullback to build a better base for it's next run. I still think a pull back to $35 would be very healthy (ok so maybe we can just get down to $40 and not $35 -- that would still be healthy).

I subscribe to a metals newsletter and they think silver is getting ready to top out around $50 -- but strangely they are very bullish on gold. This is a bit of a contradiction as silver and gold do have a clear correlation to each other and from what I've seen (in the historical charts) it's hard for one to have a big correction without the other also correcting.

Another negative for a continued silver run is how the silver mining stocks have been stuck in the mud for the past 4 months (as silver metal has exploded higher). The stock market is a discounting mechanism, and I think this dynamic says people that invest in stocks think silver will be much lower in 6 months. Whether or not this is bullish or bearish, it's not clear -- but it certainly says stock traders don't believe the recent silver and gold rally is stable.

One positive for a continued silver run is I hear a lot of people getting short silver. I even heard of a double short silver ETF trading under ticker symbol ZSL that had huge volume lately. This actually is sort of bullish for silver prices, as when there are a lot of people short, they can get "squeezed" and have to cover their positions. This can cause silver prices to rise.

From a technical analysis perspective, we could be at a double top (perhaps triple top) around $50 --- however typical tops have very fast, near explosive downward moves after reaching the top. So if we just sort of hang out here around $48 to $49 for a few weeks, I think that suggests silver is not going to drop precipitously. So the longer we hang out at these prices, I think the chances of a big correction are reduced.

I do think this is a very "unloved" rally in silver and gold. Most people I know don't own any silver or gold. Even the people long the metals have a bit of a sense of disbelief at these prices and almost appear quick to sell and get out. (Just look at all the people on this board that sold their silver as it climbed above $24, $28, $32, $36, $40. Even I dumped out of silver in my retirement accounts when it got close to $50) Certainly that part of it would suggest we are not at a MAJOR top. Since major tops happen when EVERYBODY is in and long and very bullish -- not when everybody is skittish and in a state of disbelief.

So all in all, I feel confused by several conflicting dynamics -- I do think silver will go higher later this year (probably in the Sept to Nov time frame) -- but we are OVERDUE for a good correction in silver down to $40 at least (and $35 would make me feel happy). So between $35 and $40 -- I would go long silver again in my retirement accounts -- until then just playing a waiting game.

However if silver hangs out here for a while then starts moving higher and breaks above the 1980 high of $50.36 (i think) ... all bets are off and it looks like the bull run continues.

I sold a lot of my "paper" long silver positions in my retirement accounts with silver prices around $49.50 -- However the hoard of gold and silver coins I bought, I bought for long term, and I'm not selling (even if silver drops by $25).

These sure are interesting times!

 

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What a great post. Intelligent, well wrote, thought provoking.

 

I agree, well written post Winged.

For the con, if I may, I would suggest instead the fact that indexed to inflation silver would be today about $20, and gold about $1500. Since gold fits this number, why is silver in particular so much higher? It is the ratio of this commodity to most other commodities that bothers those of us you label bears, not the nominal dollar value. If inflation shot to 20%, I would still look at the ratio of price of silver versus other commodities to discuss relative over/under valuations. Inflation/money printing/fed action cannot explain silver's strength versus similar assets.

Just my two cents, and not trying to argue or derail your thread man.

Chris

 

I agree with your concepts. One slight difference is in Silvers' correction. If it continues to hang out in the mid forty range for about 1 or 2 months, I think that would be it's correction. It would let all the other negative factors loose their steam and the traders getting use to where its at. Once all the talk settles down and realization sets in, it will start to move up again and perhaps even see this rest or flat cycle repeat several times. Then it will be just like a carnival and the barker shouting; "... and where it stops nobody knows".

 

Thanks clay.

Medora, interesting point. Could you clarify where you got the $20 inflation adjusted number for silver? If the "fair value" of gold is $1500 and silver $20, that would put the Gold:Silver ratio at 75 to 1 ? Isn't that awfully high historically speaking? I think I read recently that the 200 year average gold silver ratio is 31 to 1. It's sort of interesting that the gold silver ratio at todays prices is about 31:1, which matches exactly with the 200 year historical average.

I have started to wonder if this recent explosive move in silver was simply silver "catching up" to the big run in gold and silver getting back into alignment with this historical 31:1 ratio. If true, I think we'll see gold and silver start to move more in tandem (and not so much having silver making 3x and 4x times the move of gold in a given day).

Another bullish factor for silver is it's accessibilty (affordability) by common people, as most people can't afford to run out and buy and ounce of gold, but they can afford a few ounces of silver each week.

A final bullish factor is the silver market is much smaller than the gold market, and I think (from what I have heard on CNBC) there are actual physical shortages of silver (but not of gold). So some of the recent silver run may be due to supply side shortages. More demand + tight supply = higher prices. My local coin dealer that does HUGE internet shipping of bullion, has had big problems this year keeping silver in stock. They have been sold out of all ASE's 3 times already in 2011, but they have plenty of AGE's on hand.

 

Excellent post. Thanks for sharing WingedLiberty. Not a bad time to sell some silver paper at all. Nice move. Glad you're keeping the physical. =)

Too far, too fast for silver? Maybe, but in my mind it's more likely that the massive short positions have been holding it back. It jumped up near $50 and got swatted down a few days ago, but since then gold has been on the rise which makes me feel a lot better about where silver is at now. Since they do seem to be moving in tandem again, I would expect any correction to be applied universally. I think we are witnessing a new bottom until the next time the rules of the game change.

As far as silver mining companies being undervalued, I would point to the fact that silver is mined primarily as a byproduct of other mines. Primary silver mines are the minority. An article I read a while back indicated this distinction was based not on the amount of silver in a mine, but on the amount of profit it brings compared to other metals. So a lot of the silver being mined doesn't show up in those stats, because those mines are categorized elsewhere.

 

Inflex, research these two mining stocks ... If you have any thoughts, feel free to share.

silver... SLW
and a gold/silver miner ... GG

 

A few months ago I simply took the PM price in the mid 30's and used a risk free return assumption of about 6%. You make a fair point that you may feel silver was price manipulated low for decades, (not sure I believe it, but still), and that would affect it. My general point was the ratios between silver and most other commodities are changing, and many here point to fed action, or QE, or inflation, to justify silver increase. I was just pointing out that all commodities should have changed due to those factors if they were the only reasons for silver price changes. Since they have not all gone up the same, there has to be OTHER reasons for silvers rise. Its an important distinction that should be discussed. I would agree that a move to $20 or $25 in silver would be roughly equal to other commodities recent increases, maybe even $30 if you pushed me, but that still begs the question what is driving the additional price rises, and are they sustainable.

I don't have answers, just questions.

Chris

 

Everyone I know that owns silver does not own it to invest in and make a quick buck off of but to hold it for long term protection.

Like you said, I can walk into one of my three local coin shops on any given day and buy gold. Silver, on the other hand, is nearly impossible to find. The only silver my local shops get is what people in town sell them, their suppliers are out and are struggling to get more in. ASEs? Maples? you won't find them anywhere near me. We are stuck buying generic.. the best thing we can get is maybe a few Sunshines here and there and maybe a few Prospectors. In fact I have resorted to buying those hexagon ounces, stanta claus 1982 ounces, burned silver, etc. I get whatever I can.

I don't think silver is on a bubble. I don't know if this is the new norm but I definitely do NOT believe that silver is in a bubble.

 

I would argue to opposite actually. If you could go into a store and they had sufficient stock and the price was $50 an ounce, then that would be a sign of a stable market at a stabilized price. Having bare shelves to me means an unstable price. Am I saying that silver could not go to $100 an ounce? Absolutely not. I am just saying, looking at a market where no great mining shortages have occurred, no great new end use has been created, (except investment), and a growing investment stockpile inventory growing every day, abnormally large price appreciations above similar assets makes me very nervous.

This is just how I am viewing it right now, not knowing at all where a peak may be, but seeing a market being driven by psychology more than any other factor.

Just my opinion, and I will stop posting them here because I seriously am not wanting to hijack Winged's nice thread.

Chris

 

thanks for confirming this ... my local dealer has always had rolls of ASE's for sale (any year you wanted) ... not any more. they havent had any rolls of previous ASE years for 2 months ... and they keep noting "out of stock" on 2011 ASEs (another shipment due in 2 weeks) ...

There might be different levels of ASE distributors ... perhaps dealers like APMEX are plugged directly into the USMint and get more regular supplies?

​

 

Keep posting ... i like hearing an opposing viewpoint ... what better way to learn (from each other)

I think it's an interesting topic to discuss (or argue about!) :loud:
​

 

I would stick with a combo silver/gold basis in investments or stocks as it looks to me as if speculators are beginning to look at gold as the undervalued ratio and silver as the overvalued ratio and realigning their investments as such. On one of these threads, I mentioned I was leaving silver and going to gold/silver companies, and eventually expect to rotate into gold. I am having this feeling reinforced today. IMO.

Jim

 

You might be on to something there desertgem ... it's interesting ... but today was the first day in months that Gold markedly outperformed Silver. That hasn't happened this strongly since last Summer.

 

You never state what forces that you feel are going to cause silver to go to $100 in a few years. If you don't understand this, then it's risky to count on this metal in the long term. I disagree that gold and silver have any correlation between them except the mistaken belief by many that gold and silver are linked to each other as they were when it was defined this way in law.

Something else to consider:

Silver 1980 boom - Hunt Brothers
Silver 1999 boom - Warren Buffet
Silver 2011 boom - Strong rumor of Russian billionaire.

In each case these investors attempted to corner the market buy buying every short on the Silver futures market which is what is taking place now. And in the first two examples, when either the banks or the investors battling each other, throw in the towel, then silver crashes back to earth. This is the reality of what is going on with silver.

Gold on the other hand is mostly immune from this kind of price run up because gold, unlike silver, is held by governments and central banks as a monetary asset. In fact they hold a significant amount of the worlds supply of this metal which makes it impossible for an investor to corner. Gold is also bought by governments and central bankers as a hedge against the US dollar. These two items make this metal fundamentally different as an investment than blind speculation of silver.

 

There was a silver boom in 1999?

 

"What drives the market?" and essentially we spend a lot of time arguing about that because we know a lot of variables to the market but none of us know for sure what actually drives it beyond the point of human demand. In 1500 the price of an oz of silver was estimated to be about $800/oz and it has gradually fallen ever since. To me the entire PM market is completely illogical.. if we were to hit the reset button and be shown gold, silver, platinum, and palladium, the use of each, and the rarity of each, I think we would see a completely different market today. I honestly think gold would be the odd man out in the group and the rest would be highly highly valued. But of course, that is not the way that it works, especially when we value history. Only about 3% of the people on earth even know what Palladium is, only a small fraction of a percentage own any palladium bullion. But just about every person on earth could tell you what gold and silver are, it is historically known, and a lot of that human aspect drives the market, yet what logic is put into it? Why should gold be worth 33x more than silver? That is absolutely absurd to me when using my reasoning skills, absolutely absurd! Yet using logic that I was taught watching tv, reading books, playing games growing up, it is gold that made the world go round, it was gold that was hoarded and buried by pirates, gold that made video game characters rich, gold that was just a universal sign of wealth. In fact a lot of fiction says that 100 silver coins are worth 1 gold coin.

I personally believe that gold is far overvalued and silver, platinum, and palladium are far undervalued (proportionally to their value today, of course). I believe that one day this will all correct itself but that is a long time into the future.

Silver has long been the forgotten red headed step child of the PMs. Most people buying it cheap were the ones that wanted to make some money off of it as an investment. I DO however believe that it is different this time, I believe this is the first real revaluation of silver since 1500 AD….

Is this a bull market? YES but is it just a bull market? NO. Why? Because we have the "investors" (those trying to make a "quick" buck or those holding onto it for the long run) and we have the group called the "protectors" (those hoarding it to protect their wealth because they believe the inevitable is going to occur). "Oh but the protectors always show up when there are whispers of economic collapse." Right, but this is to the largest scale I have ever seen. It has been discussed on here before, there are those on here calling a top of $50 and there are those waiting for a new currency. We may even put the Chinese government in the "protector" category because they think the dollar will collapse.

What I believe is happening right now is a lot of the investors are getting out and selling, while those looking to hoard are buying at these high prices, because they believe the dollar is worthless. As more and more investors get out more and more protectors get in, changing the dynamics to favor the hoarders rather than the sellers. Right now I think we are seeing this transition because the selling and buying of silver is going crazy (in the idea that investors are selling and protectors buying, with a bit of a bull market in there as well). All of my friends and colleagues are refusing to buy silver right now as an investment because it is just "too high" or "too risky" however, those that do buy are buying for the long term protection. This is why I believe that this physical silver shortage is happening. While it does scare me that silver is getting harder to find and yet not shooting up in value (although it really has..) I think that the market manipulation can only continue to occur so long as the bullish investors continue to gamble. Right now the dollar has no signs of life, and so long as the "protectors" are the ones hoarding all the silver the demand will skyrocket.

So to change my answer, do I think that silver is on a bubble? Of course, but not the bubble everyone is talking about, I think the bubble IS this transition period, the fear is very much alive and is driving the market up, and so long as the fearful hold the silver and the dollar continues to decline the silver market will continue to go up. The bubble will burst to an upward price of silver… and with my earlier comments, that is silver that is valued the way we've looked at this these past 100 years, the red headed step child. If silver does go up, I think it will be looked at in different light, people will sing its praises and it will never be the norm for it to drop to such low prices again.. it will forever be remembered as being "precious" because that is the way we will view it leading to the way our children will view it.. in the same way that we all value gold because our fathers and their fathers did.

Silver is here to stay.

 

I enjoyed reading your analysis, palladium ... very interesting perspective.

I agree that I dont really totally understand the price of gold either, except that gold has always been accepted as a store of wealth historically speaking. Unfortunately, it's a pretty metal that really doesnt have any use. That's why I prefer silver to gold -- I like that silver actually has industrial uses and right now I have about twice the dollar amt of silver as gold.

One thing I think is true though ... gold trades like another currency (a hard currency).

Silver is great because I think it has the "store of wealth" aspect (same as gold) as many societies used silver coins as well as gold coins, but has the industrial use kicker.

As to why I think silver will broach $100 an ounce in a few years ... my basic reasoning is that the massive money printing, too low interest rates for too long, and massive debt ... will lead to marked dollar devaluation ... driving the prices of PM's (in dollar terms) higher.

With huge multi-trillion dollar deficits, the govt has 3 choices:

1. they can tax more (which is political suicide so few politicians want to do that)
2. they can spend less (don't hold your breath)
3. they can inflate the debt away

Option 3 is the least polically dangerous (for now at least)

Could I be wrong about this? Sure. However based on what I've seen in this country over the past 10 years, I seriously doubt I will be wrong. But who knows really, that's what makes these discussions so interesting.

 

As long as gold and only gold, is held by governments and their central banks as a monetary asset it's value will be unique among the precious metals. People often fail to grasp the significance of this and especially when they are coming up with notions as to why their other investments make for sound investing. The USA got rid of its silver reserves decades ago. It kept its gold reserves. (Ft Knox and West Point) The Federal Reserve has an even larger stash of gold at the NY Fed.

When governments are forced to give up their fiat systems after they have collapsed they always return to gold as the definition of wealth. Sure, they toss in silver and other metals, but this is only so there can be more "physical" to work with. Silver has no value unless it is defined by government in terms of gold and in the USA, this hasn't existed since the 1930s. (and completely removed by 1968) Note the USA still defines the lawful dollar, that is a dollar that is issued by the federal government, and not the federal reserve as $42 lawful dollars to one ounce of gold. There is no definition for silver.

This is why gold and silver will never be equal in terms of wealth preservation. Silver prices are being run up on the comex by naked shorts which a certain TBTF bank is running up a huge amount of risk that is going to be nasty when it finally pops. Similar to that once other sure thing, the US housing market.

 

fatima, so based on that ... what is your long term prediction on the price of gold ... and silver ... just curious

do you think that one reason governments got rid of their silver reserves is it takes too much space to store a large amount? if I had 100 billion dollars to put into a metal then vault it and guard it ... i would buy gold as well ... silver is just too unwieldy in large dollar amts