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Silver bearishness has
naturally mushroomed following this metal’s rough December. A growing
chorus is declaring silver’s secular bull finished, implying it must
have peaked after silver’s dazzling April 2011 surge. But secular bulls
climax in popular speculative manias, which dwarf the silver action of a
couple springs ago. Looking at silver in real inflation-adjusted terms drives
home the point its bull is far from over.
For any multi-decade price comparison,
adjusting for inflation is essential. A dollar today is worth a lot less than
a dollar in the past. The Federal Reserve keeps conjuring up new fiat dollars
out of thin air, inflating the money supply. As it grows faster than the
underlying economy, relatively more dollars compete for relatively less goods
and services. This monetary inflation bids up the prices of everything.
And to get an idea of what a
secular-bull-ending popular speculative mania in silver
really looks like, we have to travel back to the last one in early 1980.
Silver peaked at the then-breathtaking level of $48, which no longer sounds
extreme. But a dollar back then went a heck of a lot farther than a dollar
today. The intervening three decades of relentless inflation have greatly
eroded each dollar’s purchasing power.
Back when silver’s last secular bull
climaxed, the US median household income was under $18k! Today
it is around $50k. Across the nation new houses averaged just $76k while new
cars generally ran less than $6k. A candy bar cost a quarter. It is grossly
misleading to look at decades-past prices without first converting them into
today’s dollars which we all understand. That creates a righteous
apples-to-apples comparison.
Unfortunately the most widely accepted
inflation gauge today is the US Consumer Price Index. Even though it greatly understates
true monetary inflation
for political reasons, it is still the inflation yardstick that Wall Street
accepts. Using the horribly flawed CPI to recast past silver prices into
today’s dollars is actually very conservative. Since this construct
lowballs inflation, it really understates silver’s last mania.
This first chart looks at the last four
decades or so of silver prices, showing what a real bull-killing popular
speculative mania looks like in today’s dollars. The nominal
(not inflation-adjusted) silver price is shown in red, while the real
(inflation-adjusted) silver price is superimposed in blue. This uses the CPI
to recast silver prices in constant November 2012 dollars, the most recent
monthly CPI data currently available.
Silver has always been a hyper-speculative
metal, which greatly amplifies the magnitude of its popular speculative
manias that climax secular bulls. The terminal ascent of its last one in late
1979 and early 1980 was mind-boggling. It skyrocketed vertically
in a legendary parabola, and then immediately collapsed in a legendary crash.
In today’s dollars, silver’s January 21st, 1980 high was actually
over $142 per ounce!
A popular speculative mania is a far cry
from even a strong bull-market upleg, they’re
entirely different beasts. During these ultra-rare events, an entire
population (not just investors) becomes enthralled with a rocketing price. It
comes to be seen as a sure thing, an easy path to quickly multiplying wealth.
This leads to crazy behaviors that would never happen in normal times, often
called the “madness of crowds”.
The mainstream media covers the rocketing
price excessively. It becomes the hip topic of choice in nearly all
conversations. People who never invested in that asset before literally
borrow money (even mortgage their houses) to buy as much as they can as quick
as they can. People are hypnotized by the rapid gains, foolishly convincing
themselves that the price will continue surging forever. It is pure insanity.
While the spring 2011 silver upleg was certainly powerful, it was nothing like a
popular speculative mania. The only people captivated by silver’s
advance then were a small fraction of total investors. Silver was not covered
in the mainstream media and even CNBC gave it little airtime. Silver was
certainly very
overbought and needed to correct, but this bull’s latest peak was
not driven by the general population.
And this real silver chart really drives
home that critical point that guts the bears’ thesis that
silver’s bull has ended. Silver’s advance in today’s
secular bull has been much more gradual than the 1970s one. Its April 2011
peak near $50 in today’s dollars was only about a third
of its January 1980 one. And afterwards, there was no crash like we saw in
1980. Silver consolidated high and held most of its gains.
Provocatively, today’s
silver bull ought to ultimately see a popular-speculative-mania-driven
real peak that far exceeds January 1980’s. Back then the rest of the
world was much poorer, so most of silver’s mania was from American and
European buying. Today Asia is far wealthier in real terms, with growing
middle and investor classes that have a deep cultural affinity for precious
metals. Imagine when they go crazy for silver!
The Information Age will also contribute to
a bigger speculative mania. Several decades ago financial information was
hard to come by, but today it is ubiquitous. When silver eventually starts
marching higher in its secular bull’s mammoth terminal ascent, the
Internet will be abuzz with hyper-bullish commentary. This will seduce in far
more normal non-investor people than participated in the last mania.
Silver’s latest April 2011 peak, the upleg leading up to it, and the secular bull that spawned
that upleg truly look nothing like the last secular
bull. Silver still remains a tiny alternative investment scorned by Wall
Street and ignored by mainstream Americans. It has yet to capture the popular
imagination as the ultimate sure-thing investment. We haven’t seen
anything close to a popular speculative mania yet.
While that first chart revealed how small
and gradual silver’s current secular bull has looked in constant-dollar
terms, it is also important to consider the terminal gains. The signature of
manias is the sheer speed and magnitude of the rallies they ignite. When a
vast new pool of capital starts deluging into an asset class that is too
small to handle such demand, the resulting price spike defies imagination.
This second chart zooms in on
silver’s last secular bull rendered in today’s dollars. It notes
the terminal gains in silver’s two largest surges of that bull, in
nominal terms since these are short multi-month spans. It also shows
silver’s nominal calendar-year returns, which also strongly suggest
silver’s current secular bull is far from over. The contrast between
silver’s last secular bull and today’s couldn’t be starker.
These final two charts are best considered
as a pair, as together they really highlight just how immature silver’s
current secular bull looks. Since we’re on the
popular-speculative-mania thread, let’s start with terminal gains. I
broke them down into monthly increments, showing how much silver surged in
the final month, 2 months, 3 months, 4 months, and 5 months leading into
major toppings. The results are telling.
The first huge surge of silver’s last
secular bull happened in early 1974. In the final month before silver’s
peak, it surged 67%! Don’t let that slide by without thinking about it
first. A 67% gain in a single month is breathtaking. If that happened today
starting at silver near $30, it would be over $50 just 4 weeks from now. The
final 5 months before that 1974 peak saw silver rocket 134% higher, once
again incredible.
But as amazing as that 1974 surge proved,
it wasn’t a popular speculative mania. Mainstream investors who never
before thought about or bought silver didn’t flood in. That
didn’t happen until late 1979 and early 1980. And the terminal gains
seen in that last mania were truly epic. Silver skyrocketed 104% higher
in that surge’s final month alone! In the final 5 months, its price
blasted an insane 417% higher!
If you scroll down to the next chart
showing today’s secular silver bull, the terminal gains seen leading
into its latest April 2011 peak paled in comparison. Despite how exciting and
profitable silver’s spring-2011 surge proved, this hyper-speculative
metal only rallied 31% in that upleg’s final
month and 81% in its final 5. This is less than a third and less than a
fifth of what was seen in the last speculative mania!
Secular bulls don’t end until they
bloom into a popular speculative mania that sucks in normal everyday
non-investors heading into the climax. And when mainstream capital pours into
an asset that hasn’t seen so much demand before, its price explodes
higher with a fury that can never be matched in even the largest normal upleg. The terminal gains in April 2011 were nowhere near
popular-mania velocity.
And the aftermath of that flood of popular
buying is a crash. Once greed gets so extreme that anyone willing to
buy has already bought, only sellers remain. So the mania price promptly
collapses. Note above that the silver speculative mania ignited in August
1979 near $27 real. After shooting up to $142 in January 1980, silver was
back down near $32 by March 1980. The entire mania was wiped out in
just 2 months!
Contrast this with the April 2011
aftermath. That large upleg really started humming
in September 2010 after breaking above $20 real. It peaked just under $50 in
today’s dollars in April 2011. But despite the subsequent near-crash, the worst
silver levels seen in the couple months after the peak were still near $34
real. So instead of the entire upleg being wiped
out, nearly
half its gains survived even at worst.
And the longer-term aftermath of a popular
mania is even more severe. When people get fooled into buying into the top
near mania-extreme prices, the subsequent losses are so brutal that they
never come back. In calendar 1980 and 1981, silver collapsed by 44% and 47%
respectively! The general public that bought in and fueled the mania was so
demoralized that they aggressively dumped silver for years
to come.
Meanwhile in 2011 and 2012, silver merely
lost 10% and then gained 10%. Such modest losses after a big upleg are definitely not what the devastating aftermath
of a popular speculative mania looks like. Instead of collapsing like after
the 1980 bull-killing peak, silver simply consolidated high in recent years
holding on to most of its secular bull’s gains. And they themselves
offer another major contrast.
Popular speculative manias are so massive
that they drive their underlying secular bulls’ gains stratospheric. In
nominal terms silver launched a staggering 3627% higher in its last secular
bull, and this translates into a still-amazing 1859% in real
inflation-adjusted terms. When the public falls in love with and floods into
an asset, the resulting bull-market gains end up being gargantuan beyond
belief.
In today’s secular bull, as of its
latest April 2011 peak silver was only up 1094% in nominal terms and 842% in
real terms. These are less than a third and a half respectively of the
precedent the last secular silver bull set. And remember that happened without
significant Asian participation in a much-poorer world with vastly
less paper money, and without the Internet to whip up non-investors into a
silver-lusting frenzy of new buying.
And finally consider silver’s
calendar-year returns. Back in the 1970s they were erratic, with down years
and mild up years sprinkled between the big up years that made the entire
bull. As a speculators’ playground, silver sure doesn’t rise in a
nice straight line. It surges dramatically and then consolidates for a long
time. These consolidations shake out naive investors who don’t
understand silver’s nature.
And silver’s annual performances have
been erratic in this bull too as this final chart shows. Sometimes it is up
big, sometimes it is down big. But even large down years like 2008’s
stock panic don’t prematurely end
silver’s secular bull. It bounces right back as sentiment recovers,
something to remember today in this current environment filled with silver
fear, despair, and bearishness. Silver’s gains aren’t smooth.
But there is definitely a mean-reversion
tendency in silver’s returns. Weak years are generally followed by
strong years, and vice versa. After 2008’s stock panic crushed it,
silver soared 52% in 2009 and 83% in 2010. And those incredible years led
into the high consolidation of 2011 and 2012, with their 10% loss and 10%
gain. So if silver’s secular bull is indeed alive and well, it is certainly
due to surge once again in 2013.
And there’s one more thing to note in
this real-silver comparison. Today’s secular silver bull, while
erratic, is much more consistent than the 1970s one proved. Silver’s
gains have been more gradual, the periodic sharp surges as greed waxes
excessive haven’t been extreme like the 1974 example. This implies
today’s bull has a much larger investor constituency deploying capital
more gradually over time.
Thus today’s bull is considerably
more robust, it has a stronger foundation than the
1970s one. This supports the thesis that today’s secular silver bull
will ultimately prove larger than the last one. The better the foundation,
the more investor capital deployed before that crazy
popular-speculative-mania phase sets in, the higher silver can potentially
rocket when the general public finally comes storming in.
So despite all the silver bearishness out
there today spawned by silver’s recent weakness, its secular bull looks
far from over. Popular speculative manias cap secular bulls, and though the
spring-2011 upleg was strong it was nothing
remotely close to mania-caliber. Silver is going to see much higher highs,
dwarfing April 2011’s near $50 real, before this secular bull has fully
run its course and finally gives up its ghost.
Interestingly, silver is already in a young new upleg
that most traders refuse to see because they are blinded by today’s
bearishness. While this metal was pounded back down near $30 in December,
just under its 200dma, it spent much of last summer languishing around $27.
Silver is slow to gather steam, with gradual early-upleg
buying slowly building momentum into the exciting large late-upleg surges.
And the Fed’s new QE3 Treasury monetizations that are just starting this
month are wildly bullish for silver. This metal has always been a go-to asset
in inflationary times. That last mighty upleg that
peaked in April 2011 happened to be largely driven by the Fed’s last
major inflationary campaign, QE2. So 2013 is shaping up to be an amazing year
for silver, and probably even better for the beaten-down silver miners.
When traders are bearish on silver after
its slumps, they just abandon the stocks of the companies that bring it to
market. The silver stocks plunge to deeply-undervalued levels relative to
silver, they are pretty much left for dead. This creates great opportunities to buy low
for brave contrarians who understand silver’s bullish fundamentals and
aren’t spooked by temporary weakness. The newest persists today.
Most silver stocks are trading as if the
bears are right, as if silver is doomed to grind lower from now to the end of
time. But in real terms today’s secular silver bull looks far from
over, and silver is early in what is likely to prove its next major upleg. So the excessively gloomy psychology plaguing
silver stocks today won’t last. Contrarians who
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The bottom line is a real comparison shows
silver’s current secular bull is far from over. This metal’s
latest interim high a couple springs ago was relatively low in real terms,
and resulted from an upleg that was nothing like a
popular speculative mania. And secular bulls don’t end until the
general public falls in love with that asset and starts flooding in. Silver
hasn’t seen anything like that for several decades.
The current bearishness is merely a typical
psychological response to silver’s recent weakness. When prices fall,
traders start to believe they will keep falling indefinitely. So they look
for bearish theories that rationalize their beliefs. But succumbing to this
groupthink is a grave mistake. Broader perspectives reveal silver’s
secular bull is far from over, creating a great buying opportunity for
contrarians today.
Adam Hamilton, CPA
January 12, 2013
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