Silver's Price Action Nearly Parabolic, but Is a Bubble Really Forming?

Minyanville ^ | 04/06/2011 | Michael A. Gayed

[SeekAndFind]

Every now and then, I like to run a comparative screen on my list of over 800 ETFs/ETNs to find those areas of the investable universe which are at extremes relative to the broader stock market, or relative to themselves. Given recent market actions and the incredible resilience risk assets have had as of late, I thought it might be worth identifying those ETFs/ETNs furthest away from their respective 50-day moving averages. The purpose of doing this is to see where the crowd has been putting money to work the most, and perhaps identify contrarian trades.



Silver by far and away is the furthest away from its respective moving average, nearly 18% on average for several silver-based ETFs (in terms of both physical silver, and silver miners which are the equity side of the equation). Gasoline and oil aren't that far behind, which shouldn't be a surprise given concerns about supply disruptions in the Middle East and the nuclear disaster in Japan. In tenth place is the Global Wind Energy Portfolio ETF (PWND) which has significantly underformed broader markets over the past few years. The logic here relates to the potential demand increase for wind turbines at the expense of all things nuclear.

The fact that silver has blown past all ETFs in the past 50 days, however, is worth noting and keeping an eye on. The silver market is in backwardation (meaning investors are willing to pay more for silver now as opposed to later in time), and every analyst I hear makes a compelling case for silver prices to go much higher. While it's certainly possible, I do believe in mean reversion, which generally resolves one extreme with another.

The price action of silver appears nearly parabolic in a pattern similar to the early phases of Internet stocks in the late '90s. Could it indeed be in the early stages of a bubble? Or is recent price action simply a reawakening of what the true value of silver should be in a world of endless money-printing? The only thing I know for sure is that prices will fluctuate.

[OldDeckHand]

It seems to me that since we've had the almost explosive emergence of sovereign funds, these asset bubbles have been almost unavoidable. As the author points out, first tech stocks, then real estate and now precious metals. I wonder if any research has been done to see if there's a causation and not just a (presumed) correlation.

What is undeniable that precious metals, over the long-term, are an under-performing asset relative to the stock market. I'm not a catastrophist - not with the weather, and not with the global economy. I think over the long-term, precious metals will continue to be an under-performing asset.

[MichaelCorleone]

I'm hoping, no praying, for a significant correction in silver for obvious reasons.

But it seems the fundamentals of silver (industrial uses, supply/demand, explosion of the monetary base) quite positive. therefore a break in prices would be only temporary.

The Internet or Dot.com bubble was due almost exclusively to emotion as opposed to fundamentals, wasn't it?

[himno hero]

Bubble? Gold and Silver Freak Out Index.

I think it is representative of global expectations of the destructive force sitting in the White House. Once those expectations are relaxed, then the wealth commodities will normalize.

[RobRoy]

I was in an antique mall in Kentucky last week. They had silver half dollars priced at between $12 and $15 and quarters at $6. I bought it all for $450. Not a lot, but I’ve been doing this sort of thing for a year now. It is adding up.

I don’t think these sorts of outlets are set up to handle the rapid changes in price.

[NVDave]

There has. And there is.

In the 2008 run-up, farmers could see the difference between what they got and what was being shown in the close-in futures prices, that futures were bid up over the physical by increasing margins from “reality.”

[Cicero]

No, it’s not a bubble. Gold and silver have been making new highs regularly (silver still 30-year highs), but you hardly see much excitement yet. Small headlines on the financial pages, small notices on Drudge (who is aware of the damage that Obama is doing to the economy).

Nothing like wild excitement yet, of the kind you saw going into the last highs in 1980.

I’m heavily into gold, silver, and a few rare earth stocks, and some uranium (which took a hit with the Japanese disaster, but now seems to be coming back). I figure we’re only about half way to the top, timewise.

Of course the media is unwilling to do anything to make Obama look bad, so they don’t like publicize this—or the price of gas at the pump, which is pretty much ignored—except when people drive in to fill up their cars and can’t help noticing it!

[winner3000]

Prices of food going up due to temporary disruptions (usually weather related, or government related (the stupid policy of burning corn for fuel)) is usually temporary as bubbles could burst as soon as the next harvest anywhere in the world.

Gold and silver are different in that they are hard to find, and it sometimes takes years to gain required permits. Also, the whole world is still under-invested in the precious metals, including central banks. When everybody from the bus boy to the bus boy’s grandmother is invested in gold and silver, I will say there is a definite bubble.

[Free Vulcan]

Silver is temporarily overbought. If you bought low and are in it for the long term, no big deal.

[dila813]

What this guy is missing is, Gold Shot up and Silver stayed flat, It was only a matter of time till Silver had to sync back up with Gold.

On my charts, Silver is still behind relative to Gold’s Increase over the last 6 years.

[agere_contra]

Agreed. When 1oz of Gold buys the DOW, then it's time to start worrying about the end of the PM cycle. I guess Silver will be about 800 dollars/oz when that happens.

FReepers - please listen seriously: Silver at 40 dollars/oz is a complete steal. The Fed can no longer meaningfully raise interest rates without destroying the dollar (though they will talk tough about raising rates, which will make silver dance about a bit).

So buy some! Silver is real money, and even if the world goes Mad Max you can always purify water with it.

[NVDave]

Go back to the early 80’s and look at the price of gold and silver then.

The fundamentals have little to do with bubbles. It is all about how much money is chasing something... and then one day, the big money decides to fleece the little players and they sell.

[utherdoul]

If prices start getting nuts wouldn’t large holders dump stockpiles of precious metals onto the market and then repurchase them once prices crash?

[OldDeckHand]

"If prices start getting nuts wouldn’t large holders dump stockpiles of precious metals onto the market and then repurchase them once prices crash?"

Yes, but that's true of any investment asset. However, it's called a "bubble" for a reason - once it bursts, it never re-inflates, at least not to the level that it was before the collapse, even with people buying back in. The problem is that even on the rebound from the "bottom", there isn't enough demand to drive the asset price(s) back to the over-inflated levels.

That's the super-simplified explanation. There are other factors, like leverage, that factor into it as well.

[agere_contra]

Until Gold reaches ~ 1 DOW per oz, anyone trying that would find themselves scrabbling to buy their silver back.

Silver buyers know about the PM v DOW cycle: they’re not going to be scared off by a Silver dump. They will laugh and buy physical.

Right at the top of the PM v DOW cycle is another matter of course. All the smart money will be selling at that point - and not buying back.

[Terry Mross]

You got a great price on those quarters. A reputable place I know is charging $7.08 each when you buy 400.

[BooBoo1000]

When you sift through all of the B/S on this report, the only thing that stands out is that Silver is going up/ China is buying silver in 250 Ton Lots, for industrial and jewelry. Gold is too high for jewelry so they are using silver.

[WhistlingPastTheGraveyard]

Some good stuff from ZeroHedge:

Silver ETF investment:

Silver Industry Market Cap:

Considering 30 year highs are being obliterated, silver is still flying under the radar. There's a lot more talk about it on FR than ever before, but we're not average Joes. We live and breathe this stuff. Once Ag crosses $50 and sets a new all-time high, maybe it will find its way into the MSM and mainstream consciousness. When you see your neighbors cars filling up the parking lot at the local coin shop, then we can start talking about the possibility of a bubble.