Silver Bubble Fueled By Small Investors

Those who fail to learn from the past are doomed to repeat it.


We have seen this time and time again. When the price of an investment vehicle rises it attracts small investors who are unsophisticated and inexperienced and often enter the game late (after the prices have risen to high levels). We saw it with stocks in 1929. We saw it with gold and silver in 1980. We saw it with tech stocks in the 1990s. We saw it with real estate in the 2000s. And we are seeing it -- again -- with gold and especially silver today.

If the silver bubble has not burst it has certainly sprung a leak.

I found the following article interesting:

Silver-Mad Small Investors Fueled an Epic Rise and Fall

 

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silver market opens in 1 hour- we shall see what happens- this week will be interesting

 

A couple of seemingly simple rules could shield the majority of sheeple from getting slaughtered.

1. Buy low, sell high

2. You haven't lost a cent until you've sold.

Unfortunately, at least 50% of the 'investors' out there in any given market, much like Mr Zometsky in your first example, insist on doing exactly the opposite, because both these rules run counter to human nature, and the herd mentality.

 

I think a big problem with people is we have a comfort zone...we figure as long as it's going up and whenever we buy in...it's just going to keep going up...and then when it goes down said people sell like crazy to run away from it...

 

Simple rule I learned long ago when it comes to investing;

Pigs get fat, hogs get slaughtered.

 

A few days ago I saw a fascinating article that super-imposed these 2 graphs on top of each other:

1. graph of the price of silver 5 days before the current crash, the crash day, and then 1-2 days after
2. the same periods from the crash in 1980

The results? The graphs were practically identical, with the same key points on it (the peaks came the exact same number of days before the crash, and then took the same time to drop 30%, and then fixed itself by a $1 or $2 the day or two after the price crashed). I can't find it now, but it was very interesting to look at.

So "+1" to the idea of people not learning from the past.

 

What?

I think you're looking for "Bulls get fat, and bears get fat, but pigs get slaughtered."

 

Eh, it basically means the same thing. Greed is good, too much greed will screw you.

 

And many times it is well deserved. Greed is what drives much of our economy, axcessive greed is what will eventually destroy it.

 

Indeed.

 

It's the "Ameritrade" and the "Scott Trade" guys that will, in the end, bring down the market. The fat guys will have checked out "long time ago".....

 

Small amateur investors, like Mr. Zometsky, do incredibly stupid things (buying when prices are peaking) but I don't believe they, as a group, significantly influence PM prices. Prices are still controlled by large futures speculators, and small investors are simply tag-along gamblers.

 

Buying when unemployed also seems incredibly stupid.

 

I'll bet a lot of folks who were heavily invested in tech stocks in the late 90s would disagree with that.

 

So would the holders of czarist and Cuban bonds.

 

True, but I highly doubt silver will go to zero. Then again, almost anything is possible.

 

so since the SP 500 has doubled in value since it's 2009 low, does that mean it's full of small (little guy) investors that are driving stocks up and that the stock market is getting ready to crash? just curious. it's not clear to me how you are differentiating between a longer term bull market and what you are calling a bubble.

Silver is up 4x since the 2009 low, so what ... apple stock is up 4.5x ... netflix is up 12x ... oil is up 3.5x ... are all of these "bubbles"?

Honestly i don't think the "little guy" is in the silver market to any great degree. Do you know any one of your friends or family or coworkers that is buying silver? It's quite a bit different than 1999 when your cab driver or people at parties would tell you about the money they're making in dot.com stocks

From what I have seen, the small investor has been selling (as have most of the people on this board). I think the big drivers in the silver market has been the hedgefunds and high frequency traders who were simply following a momentum trade. This decline in silver was driven entirely by ETF selling due to the multiple raising of margin requirements on silver by the CME over the past week ... and not the physical silver market (there has been and still is a shortage of physical silver).

 

WingedLiberty - I don't really understand the raising of the margin requirements. Can you explain a little further?

 

Basically, the larger traders were using options (puts and calls, mostly) on silver to raise the price, and when you do that, you have to have a certain percentage of equity backing up that option. Now, the large trading houses are at risk of default and being screwed if a trader goes broke using puts and calls, so they raised the amount of cash/tangible assets required of the major movers to keep their current positions. Rather than pump more cash/assets into the push to get silver up, they dumped their options, causing prices to drop.

At least that's my understanding. If I'm off, I'm sure someone will correct me.

 

A margin requirement is basically a measure of how much of one's position in an investment (a stock, oil, corn, silver, gold, copper, etc.) must be bought with one's own money vs. how much can be bought with borrowed money

When the CME (Chicago Mercantile Exchange) raised margin requirements on silver last week ... basically they were changing the previous "rules" for investing in silver ... rules that applied to how much of ones postion could be bought with borrowed money.

When the CME raised silver margin requirements last week, investors that had borrowed money to invest in silver and were fully margined ... were forced to sell their paper contracts of silver to raise their cash levels and drop their silver holdings so it conformed with the new required cash levels in their accounts.

The CME actually raised margin requirements on silver 4 or 5 times last week, which is basically unheard of (I have never seem margin requirements raised that many times in that short a time span). It appears to me (just my opinion) that some big well-connected players wanted silver prices lower and were able to convince the CME to raise margin requirements so that the price of silver would fall dramatically (as people were forced to sell paper silver contracts to raise cash) ... that is why silver fell from $50 to $33 in a week.

By the way, when I say a "paper contract in silver" i am talking about buying silver through an ETF (exchange traded fund) such as SLV or AGQ. When you buy those ETF's you are basically buying paper, that promises to deliver silver on demand. It's a basically promisary note for silver.