Friday, January 13, 2012

Silver bubble? What Silver bubble?

I came across an article the other day which posed the question, did the Silver bubble burst? You can read it in it's entirety here. Here is a short section from the article:
I like comparisons because – although history doesn’t repeat exactly – I think it rhymes, and when I look at both charts seperately, I think both are very nice.
However, what if the Bulls are comparing the wrong asset to the Nasdaq Bubble? What if they should rather look at Silver prices?
Click Chart to Enlarge
Back in April, I felt silver was a Bubble, as price was going VERTICAL, which (as all good things) never lasts forever. The parabola burst in April, and usually, it takes a LONG time before the next move up will start (if it ever will).
The main problem I have with the above commentary and chart is that the writer discounts all the previous spikes Silver has seen in the course of the bull market. Granted the 2010/2011 move has been the largest so far, but if we put Silver on a log chart (showing the previous spikes in perspective to the most recent) it shows that the previous spikes (03/04, 05/06, 07/08) could have just as easily been considered the bubble top if we weren't to know what followed them:

Click Chart to Enlarge

The writer then goes on to compare the Silver bull market to that of the Nasdaq during the tech bubble:
In fact, when we compare Silver to the Nasdaq, we get a much better comparison than when we compare Gold to the Nasdaq Bubble:
 

Click Chart to Enlarge
We might now get the “Bull Trap”, which means Silver might rise back towards $37-$39.
However in my opinion a much more relevant bubble to compare Silver to would be the last Silver bubble which peaked in January 1980. Here is a chart showing the price increase percentage over the last 2 years of each spike higher (1979/1980 vs 2010/2011);

Click Chart to Enlarge
Hopefully this adds some perspective to what a truly parabolic move looks like.

I wouldn't completely discount the possibility that Silver could still head lower in this correctional phase. As I pointed out several times last year, if Silver heads back below US$25 there's a good chance we will be revisiting the breakout at around $22. 

There's also the possibility that we have seen the top of the Silver bull market/bubble. However in my opinion the only scenario where that's likely is if central bankers decide to turn off the stimulus/liquidity and allow a deflationary route to take course, it has nothing to do with the recent price movements we've seen in the metal, which was only a more vigorous spike higher than we've previously in the course of this bull market.

If the Silver bubble has burst then it was certainly a moderate bubble compared to that of the 1970s/1980. There were different influences on the price of Silver to cause the last bubble spike, for example the attempt to corner the Silver market by the Hunt Brothers was a large driver of the price increase, but in my opinion the collective buying of Silver by the public as they attempt to protect themselves from the destructive activities of central bankers will act as a similar driver to push Silver into a parabolic move that will possibly even eclipse that of 1979/1980. In my opinion the bubble is ahead of us, not behind us.

Keep calm and carry on!


BB.

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3 comments:

  1. Correct me if I'm wrong. But wasn't the last silver bubble caused by the Hunt brothers, cornering the silver market?

    http://www.nytimes.com/1989/12/21/business/2-hunts-fined-and-banned-from-trades.html

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  2. If history does ryhmes as that article states. How does it apply to what we are seeing now? Market deception vs. funtamental/market concern?

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  3. As I mentioned in the article the Hunt Brothers were definitely an influence on the Silver bubble in 1979/1980, however there are also influences in the current market that weren't around 30 years ago.

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