fyi Worst Case Scenario: Late April 1987 Silver Plunge (4/28/87 ~ -35% 1-Day Loss)

In this PM Bull we've already seen one -20% decline in POS; Silver recovered somewhat but has been trending down ever since.
http://blogs.wsj.com/marketbeat/2011/09/23/silver-has-its-worst-day-since-1987/



The Late April 1987 Silver Death Spike may be useful perspective on Ag's downside risk in US market-history (even where circumstances are obviously different today.)

4/27/1987: "Silver Outshines Gold as Price Surges in Month : Inflation Fears, Concern Over Tightening Supplies Spur Strong Buying Spree" :
http://articles.latimes.com/1987-04-27/business/fi-966_1_precious-metals

Takeaways:
- POS rose 60% in mone month (in Bernuckle's Inflated Fiatscos: ~80% - 120%?)
- POS rose 3x faster than POG : "vicious rise"
- Rumors of supply concerns (shortages) : Peru & Mexico combination
- "Buying binge" from institutional players "some using computerized buying programs" (LOL) on very small ILLIQUID market
- Flippers reported, "rediscovering Silver" : "Individual investors are buying 100-ounce or 1,000-ounce bars, with some selling them back to Deak at a profit"
- Poor alternatives & investor fears: "faltering stock market, falling dollar and rising inflation"
- RING THE BELL! Market Peak.

Early in the trading session on April 27, 1987, silver commanded a price above $11 per ounce and the London silver fix was set at $10.92 on April 27, 1987. On the ILLIQUIDITY of the Silver Market, this (unsubstantiated/hearsay: wrong date?) comment: "I remember that spike in 1987 well. It was the first time I tried to sell a large amount of silver. What I found was that nobody was buying that day. When I did finally get ahold of a buyer three hours away, his typical spread between spot had mysteriously widened in his favor. It was a big lesson for me, as I watched the price quickly fall over the next couple of days."

Anatoly Veltman has some very informative perspective on 'the market trap' to digest: LOCKED LIMIT UP flipped LOCKED LIMIT DOWN.
http://www.dailyspeculations.com/wordpress/?cat=263

Does anyone here remember this event?

 

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No, but it seems that markets frequently act this way, and probably will again. Jesse Livermore used to constantly preach that it is necessary to sell into strong markets even if you leave money on the table. Selling into down markets is frequently impossible because there are no buyers. He was talking about the effect of his having very large positions, but the same lesson applies to the holders of physical bullion, or futures. The objective is to earn a high rate of return, not catch the exact top.

 

Exactly this - for Paper Investments. I'd argue (as I have) bullion is for a another purpose, altogether different.

Perhaps you might re-read Reminiscences of a Stock Operator. Jesse Livermore also carefully avoided selling too soon, preferring to let the market announce the commencement of a downtrend rather than sell short at the top of a rally in anticipation of a reversal. “Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.”
http://www.gold-speculator.com/clif-droke/41957-jessie-livermore-stock-market.html

Did Livermore ever speculate on Gold? Or say 'Gold acts like stocks' ? Stocks and Gold correlate negatively - was that unknown to him?
And are you imagining this to be a "US Gold rally" ? Even though US investors have negibile allocations to Gold - according to the recent press.

Nah, it's something else: a VOTE AGAINST THE DOLLAR instead. So how many trillion$ in dodgy Paper might become worth-less to foreign investors (the other 70%) ? What percentage of the physical currency (USD$) is held outside our borders at risk to 'Dollar investors'? Are they selling at the top, yet?

Best advice for Gold-Bugs from Jesse Livermore is (now) "Sit tight!" Read the book.

 

If your goal isn't to earn a high rate of return, I think you will succeed.
Jesse didn't trade gold because gold was money for most of his career.
I've read the book several times, and it's one of my favorite investment books. If you read a little more carefully, you will see that Jesse would "sit tight" when trading markets with a lot of liquidity, but when trading commodities [with very large positions later in his career], he would sell into strength. I think that example is more relevant for folks who hold physical gold and silver and plan to sell on Ebay or a local dealer where liquidity can vanish quickly.

 

Ah, I remember it well, the death plunge.

 

This has to win an award for the most disinformative reply on CT. What total rubbish.

1) Jesse Livermore was a stock trader; he didn't trade Gold. It's a fabrication to suggest otherwise. Anyone who reads Reminiscences of a Stock Operator can see this for himself.
Your digression is otherwise off-topic, misleading: Gold and Equities are NOT the same. Period.
2) "... most of his career"?? Gold was Money his entire LIFE and trading career. He died in 1940.
3) Had Livermore traded Gold "later in life" Gold-Bugs who quote him often would regurgitate that ad nauseum. The silence, instead, is deafening.
4) Livermore's purported prowess with stocks is of zero utility to retail and amateur ebayers of bullion, and you know nothing about "liquidity in that market" either.

It's true Livermore said he preferred trading commodities (no suggestion of PMs) but evidence of is thin. One might imagine he dabbled in grain c.1917; that wasn't as with stocks:

btw Livermore was bankrupt by 1934 so NO, he didn't profit in pre-War II commodities action 'later in life' (1936-40) either. Anyone's imagination notwithstanding.

 

I don't remember it specifically, but Cloud's point is a VERY important one I am hoping people pick up on. In a declining PM market, at least in my experience, you cannot even sell at spot. Too many people think physical markets behave rationally all of the time, meaning if an ASE sells to a dealer today for $1 over spot, it will ALWAYS be this way. They figure worst case if silver goes to $20 they can sell it for $21.

However, if a market starts a steady decline, this "premium" over spot becomes a "deduction" from spot. I was paying more than any dealer around buying 90% at 3 times face. Spot at this time valued 90% around 3 times face, but silver had gone down so long that dealers were paying well below spot for 90%. I would go to major coin shows and offers for 90% were anywhere from 2.8 down to 2.2 time face.

Point is, physical is DIFFERENT than paper. Premiums can and WILL change based upon market directions and peoples expectations, so you are NOT assured of any certain value versus the market if it goes down.

Sure, this works both ways, and there are times where premiums can go up as well. I am not writing this to dissuade anyone from holding physical, as I own a lot of physical PM, just explaining it to those new to the game. You CAN lose a lot more money than even market price changes holding physical PM.

 

This is interesting. After silver did it's intial run up to around $20.00 an ounce, it dropped to around $9.00. I had been use to paying about a buck and a half over spot on ASE's but couldn't find anything less than $5.00 over spot. This was around 2009 if I'm not mistaken. The climb and fall had been fairly quick, so I guess people weren't will to let go so soon. I bought in at around $4.00 over spot when spot passed the $10.00 mark and sold in the high 40's, so it became a non-issue. How long of a decline did it take for premiums to disappear?

 

I think your missing the main point that cloud is giving you...look at your above posted chart...

would you rather sell in march-april or may-june? I'd personally go for the march-april time myself...the price is going up everyday and one would think logically that buyers would be around at that point more so since the price is going up based on people buying in and raising the price up...people are more willing to buy in an up market then in a down market...why would anyone buy in a market that is just going down? people are greedy for one...who knows when the down arrows are going to stop? the way I see that small hickup in may that it's going down then up a few bucks then back down to $35 is the smart people sold off and took back some of their money and the buyers figured it would just go back up and after a bit it did go back up and steadily through the months gained back but then dropped off like a rock in september
there's 2 ways in the PMs market... the "inflation" long term play cause your afraid of inflation...or the "investing" looking for a quick buck or 3...if your looking for growth in your money supply invest and sell in up markets...if your worried about inflation and want to hold the value hold long term and you'll keep most of it...assuming your not buying in during an up market that is...

 

Let's check some FACTS:

1. You asked me if Jesse traded gold in your prior post. I answered, correctly, that he did not. So your response is a lie.
2. You are considering gold to be money after Roosevelt confiscated it. This is a beginner's error on your part.
3. I doubt there is a good professional trader in ANYTHING who hasn't read or heard about Jesse -- including gold traders, so your post is worthless. Anyone who wants to trade anything should study him.
4. You are pretty naive to believe that the present liquidity in the retail gold market will always exist under all conditions.

So basically you know nothing of Livermore and should stop misleading people. If you think he has nothing to teach, it just proves your inability to learn.

 

oh snap!

 

It took a long while. You are very correct sir that in quick dips the premiums go up, and in major run ups they decline. This is a major shortcoming to physical PM I have written about. Short term you can never match the profits you will make in paper in physical PM. The deck, (and dealers) are stacked against you.

Back in the 80's it took literally years for the premiums to disappear. IN the first half of the decade the dealers didn't "want to take the loss" so would price their silver what they paid for it, even though the market had gone down. A lot of them expected it to take back off again any day. It took years of new material being brought to the market, and old stock not selling at their higher prices, to force the premiums down to market levels. I would say the same would be true today. If for some weird reason silver went down to $10 an ounce this year, you would not be able to buy it for a reasonable premium. It would take 2-3 years to shake out the "silver is going back to the moon any day" crowd and force the prices back down towards market levels. You see it here, people saying "if silver hit $10 I would back a truck up". Well, ok, but what happens when silver stay static, (in which case you are really losing money every year) for a few years. How much more money will those people keep piling into the market? That is the point you have to get to for premiums to decline. The "true believers" had to either run out of money or a few years of bad markets change their minds, and then normal market pricing can reappear.

Humans are funny animals, we dwell on numbers. If something you own used to be worth $40 an ounce, that number becomes fixated in our mind and we simply refuse to believe its now worth less.

 

I consider cloudsweeper99's off-topic garbage reply unworthy of response. (His red-herrings, misquotes, straw-men etc. = "garbage.")
He replies (all too often) simply to be digressive & contentious, also. Gold is not equities, EOS. Jesse Livermore has been used to frame any number of opinions - he's been misquoted/misused but countless wannabe gurus and frauds forever, so I'm never surprised to see that again. Livermore also died broken by the mkt - suicide as a "failure" - but for annuities he wisely squirreled away in 1917. Insert advertisement for bullion-backed insurance product here: http://www.jesse-livermore.com/losing-money.html

And so bullion is but the insurance policy against rotten paper, not to be traded nor flipped... but held dearly against the Paper-Bug Lies.

Retail buyers of bullion shouldn't imagine they can quick trade(flip) it successfully, either. Imagining otherwise is pure folly. There will be no Jesse Livermore Winners in Gold, people. (Suicide traders: maybe.)

Little eBayers aren't professional commodity traders either (and won't be) - the markets are different, eBay has never been illiquid and it's egregiously lying to assert Paper Silver/COMEX is the same dog.

Back to the 1987 Silver Plunge - where the POS is a broader gauge - it remains useful to note & compare SIGNS of an Investor Death Spike.

Unsustainable Rise
1a) The first red-flag (1987) was the ~60% rise in one month. Annualized, this rate of return would be 28,048%.
1b) In 2011, POS rose significantly. At ~22.12% per month February-April the annualized return would = 1,011%.

Against Gold
2a) 1987: POS rose 3x faster than POG.
2b) 2011: POS rose 2.3x faster than POG.

Market: http://www.telegraph.co.uk/finance/...-caused-the-silver-price-spike-and-crash.html
3a) 1987: locked limit up (red flag, to evacuate) followed by locked limit down -- Cornered Mkt? --
3b) 2011: COMEX margin hikes (4) ; rumors of Chinese deflation -- "Cornered Mkt" JPM manipulation? --

Institutional>Retail Interest:
4a) -- Reported --
4b) -- Possible, unknown -- (TBE)

Rationale for PMs/ Fearful Economic Outlook:
5a) 1987: "faltering stock market, falling dollar and rising inflation"
5b) 2011: less favor to equities, fears of a falling dollar and rising inflation

Market Peak: (for 3-, 6-, 12+ Years)
6a) 1987: Short-, Medium- & Long Term, YES.
6b) 2011: Short term unlikely YES; Medium Term UNCERTAIN; Long Term, probably NO.

 

You can hurl insults and throw temper tantrums all you want. Apparently you are good at quoting media sources but have no understanding of investing fundamentals. This is perfectly okay with me because I don't care if you fail, but I don't want anyone else to be misled by your long, rambling posts into thinking there is any value to your approach. My post #2 was not aggressive or contentious, but your post #3 was an abnormal response. So you get called out for your lies. I never said bullion buyers should try to flip it for a quick trade [another lie] but that they should try to sell into strength if their goal is a high rate of return, a true statement. So you do what you want, but don't try to convince anyone that it is anything but a losing strategy.

 

Simply an excellent post. Very interesting thank you

 

In 2009, there was an aberrant supply issue for ASE's and AGEs, related to IRAs. From 3/17/2008-10/24/2008 POS fell from 20.92 - 8.88, a Loss of ~58%. So Silver players have alreaday had at least two (2) ~-50% haircuts in this PM Bull Market. http://www.cointalk.com/t219228/#post1597339

That's normal Risk, just an Interim Top followed by a retracement and obviously not evidence an Investor Death Spike. These retracements are 'times to buy' ... $29.20 isn't the low either, unless the Fed desperately starts a reflation effort again. We will likely see $22.-25. (perhaps even $19.) before we see $40. again.

I wonder how many CT bullionists would panic POS @ $25., in July/August 2013?

On pause, I presume Silver Seasonality (bull period) will disappoint in 2013. Silver's seasonality was also weak in 2010, but strong in other recent years: see chart.
http://www.greenfaucet.com/?q=node/13799