Silver in a bubble?

Political instability around the world, eg Iran, Arab Spring, implosion of EU, et al. I see silver riding gold's coattails to new highs.
In this environment I'm not sure industrial use will have a significant influences on the price of silver

 

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I tend to turn a cheek to the more mathmatical approach to investing, and rely more on macroeconomics + current events. As one of my favorite economists likes to say, " If it's raining in brazil, buy coffee." It is clear that there is a buzz in the air about silver. Even when I go to the local estate sales I am astounded by what I see. I live here in Southern Maryland, and there is a lot of old money. You should see the recent crowds that show up whenever their is a Gorham Strasbourg Flatware set at auction. Just look at completed listings on ebay, or ebay pulse, and you can sense the buzz. Bubble or not, I see silver values on the rise.

 

And those are simple concepts that the man on the street can comprehend, execute, and feel good about right?

I have said before, DCA is most powerful psychologically.

Chris

 

I agree, but if it IS a bubble it will reach a point where you have to get out or end up holding for years and years just to hope to break even.

I think physical bullion will always have a strong group calling for it to go to the moon. With paper trading you can jump in and out, take pride in your gains. With stacking I think it is as much a collection as it is an investment. I think there will be many really smart investors that will rationalize holding it way longer than they should b/c they don't want to get rid of the shiny.

I personally buy the lowest premium generics I can find, but look at all of those that buy ASE, Maples, pandas, ect. They tell themselves it is b/c it will be easier to sell. I call BS. It is the collector in them that causes them to chose those more expensive ounces, not the investor. The day they decide they have to sell it will be their generic's that go first and then lastly, with a heavy heart and single tear in their eye they will finally let go of their prized rounds, and likely way latter than they should have. IMO

 

Remember your audience sir.

You wouldn't want to ask the National Realtor's association if housing was in a bubble, or OPEC if oil was in a bubble, right?

I find silver a touch high historically. $25-28 I could feel was justified, but anything above that is a touch high.

Just my opinion.

Chris

 

Both methods require about an hour of time to learn and implement. Feeling good about them probably takes more time. But I prefer something that works to something that is psychologically soothing. Everyone has to decide for themselves what degree of risk and performance they want.

 

From the Amazon comments, I wonder whether the writers even read the book since their objections are handled in the book. The comments probably stopped because the book is no longer published. But it is very easy to apply the method using any market average or mutual fund price during the period since 2008 to evaluate the result. I agree that the book provides a methodology, not a strategy. In my case, the strategy I use is value investing. The portfolio management method in the book is very valid when used in combination with value investing. Benjamin Graham spoke very favorably about mechanical methods to vary the portion of a portfolio devoted to stocks v. cash or bonds, and even came up with a few himself. But I've never found any methods better than Lichello's, although I'm sure they exist. I've never heard anyone say stocks are a good way to get rich without work -- at least not since about 1971.

 

I never said i did either sir, but we are not the average, right? If I can sit down and over a cup of coffee explain the simple concept, get them agree to put money aside, and understand and feel comfortable about the idea, that is worth a lot. I have done this type of counseling before, and pull out some fancy methodology and most simply tune out and don't do anything.

Like I said, its preferable to most inclinations that small investors have, but simple enough to understand as to build confidence in and get them to buy into the idea. There are 1000 things we would like them to do but they won't, so proposing something slightly better that confuses an average investor simply backfires.

Just my experience in the area.

 

A good way to learn what happens in a bubble is to look at the bubble in Nasdaq stocks in the 1990s. In 1996 it was pronounced a bubble, but the market continued to rise for nearly four more years with some stocks going to heights undreamt of. So in a sense, the people who held on longer were partly correct. And while it is true that those who sold in 1996 avoided the ultimate drop, ironically they might not have done any better than those who hung on too long. So it isn't easy to decide when to buy or sell. In the 90s I was one of the folks warning about the bubble, but afterward I was amazed at how much money some of those foolish folks made before they lost it all. So it's a good idea to recognize when a bubble is forming, but leaving the party too soon can be as bad as leaving too late.

 

All too true. When it boils down to it, its scary how much investing is a psychological exercise more than a financial one. Some of the best and brightest have been completely right and wiped out because they had the timing wrong. Some extremely rich men are dumb as stumps but understand "herd mentality".

No one said life was fair. When investing, always remember, "the market can be irrational far longer than you can be liquid". Being "right" is never enough. You have to be right at the right time unfortunately.

 

No. Gold is not in a bubble. If it was, countries would not be scrambling to get their hands on it (quietly). Russia, Mexico and a handful of other smaller countries bought 25 tons of it just last month. Mexico is close to 100 tons for the year. The more interesting question is where are they getting their hands on this amount of gold.

On the other hand, silver rose 240% between the summer of 2010 and the summer of 2011. IMO, that kind of rise, without any identifiable event to cause it, is probably bubble conditions.

 

You are correct. People underestimate the psychology of investing. It is far easier to "paper trade" than it is to make the same decisions with real money.

 

I think silver just had a lot more catching up to do than gold. If the price had not gone up, it would now be below the total cost of production for most primary silver mines. I don't think $30-35 silver qualifies for bubble territory. And none of the other symptoms of a bubble such as widespread public participation using leverage are present -- yet.

 

Price isn't determined by production costs, it's determined by demand. If the demand isn't there, price drops below production and the mines shut down. Silver didn't rise 240% in just a few months because mine owners were complaining about prices.

If one believes this, then the obvious question should be, why did it have "catching up to do"?

 

Price is determined by both supply and demand. Primary silver suppliers have been faced with rising costs over the past few years, and the only way demand can be met is for the price to rise so they can recover their cost of capital.

 

Sorry to dig up a post from the first page, but I couldn't help myself. I must respectfully disagree that metals should be read the same as any commodity. They are not any commodity. Gold is a barometer for the value of currency. That's is sole function, and silver more or less follows gold. The steam behind this bull market is due to monetary policy more than anything else. So there's really no need to even understand the metal markets if you understand what currency is doing. If you do that's just added perspective, but it isn't necessary to identify why the trend is going where it is, and what needs to happen in order to either reverse it or extend it. So I have a hard time seeing gold and silver getting into a bubble. If anything the dollar would be in a collapsing bubble or an anti-bubble.

 

This would imply that silver pricing is being determined by physical demand for the metal. There was not a 240% increase in physical demand. Without the demand, it doesn't matter what production costs are. As an aside price increases due to rising production costs cause demand to fall. One has to conclude that something aside from production costs or just physical demand caused the price to rise so much so fast. Without an identifiable event, I contend it was bubble mentality.

 

Prices are set at the margin, so it doesn't take a double in demand to result in a double in prices. And for increasing physical demand to be filled, either the price has to be above the cost of capital to bring on additional supply, or the price has to rise enough to decrease demand to the available physical supply. These are economic laws and beyond contestation.

Rising production costs don't cause demand to fall. It causes supply to fall unless the price rises to enable firms to cover the additional cost.

 

Read what I said again. I said price increases caused by production costs will cause demand to fall. Oil prices cause gasoline to go to $4/gallon, people stopped buying gas guzzlers. The reason I said it is because you claimed miners were not making enough money. Hence like oilmen, if they raise their prices, then demand falls for silver products. And yes I agree with you prices are set on margin. It works in the other direction too.

Hence, I simply don't believe that silver rose 240% because the miners were not getting paid enough. It simply doesn't make sense.

 

I'm going to cherry pick this quote and take it to mean there is hope for me!

I find your debate with cloudsweeper really interesting in that I think you are both right! DCA can be a great investment strategy in that it takes no work. you can even set the the funds to direct deposit from your check so you never see or miss the money. Perfect for those that do not want to think about it and/or those that would just blow the money if they had the chance to. I think there are also many very well informed investors that use this strategy so it must have it's advantages above and beyond it's simplicity.

On Cloudsweepers side, I have to say if I went to an investment professional for guidance and was told DCA is the best and only way to go, I would get really upset down the line as I learned more about the market and discovered there are other ways that are more exciting and potentially more profitable that I was never told about. I would want this professional to tell me you can do A, B, or C. the right choice for you depends on how much risk you are willing to take and how my time you are willing to invest in the process. Those that are terrible with money or work 80 hours a week and don't want to think about it on their down time can DCA. But please don't assume someone is too dumb or lazy without probing them first.

this is my laymans perspective of the debate anyway. Let's all shake hands and go get some coffee! Fatima you can come to, but please be aware that the price of coffee has gone up due to production costs, so you may not want any.