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-- Posted 1 October, 2004 | |
By Rock Gale, Ottawa, Canada September 20, 2004 I started writing and investing in silver more than two years ago when the Price Of Silver (POS) was $4.50/oz. In one story, I flogged that tired old rocket metaphor yet again. Why does seem it get used so often? Is it really an appropriate analogy? And if so, I wonder if I can plot its trajectory. I must warn non-technical readers that this article may cause extreme drowsiness, which could possibly lead to narcolepsy. If Silver really is like a rocket it should obey Newton's Laws. How can I test Silver's adherence to the Law's of Motion? Well, being socially challenged, I find that I have a couple of extra hours…Let me see. If Silver acts like a rocket, then the trajectory of its price curve should fit a Newtonian Equation. Oh my god! I am a True Nerd! This should be easy. Most of us, in high school, studied Physics. I remember that it was like being hit with some super secret government nerve gas. Just mention Newton's Laws and the class was asleep instantly, but the theory as I remember, was quite simple, and could have been interesting if they'd given us all motorcycles to ride. Because a crotch-rocket - is a great way to learn about acceleration! A true rocket must, I think, have gobs of measurable acceleration. It's very easy to wave your hands in the air while looking at Silver fundamentals and point to the moving averages and upwardly sloping support lines on the Silver charts, while loudly proclaiming that Silver has acceleration, and so thusly QED, with a bow and a flourish, we have proven that Silver is a Rocket-like thing. But I'm not a silver-tongued CEO, or a Federal Reserve Chairman, or even a minor politician. I'm an engineer. I deal in facts and logic, not lies and deception. I should be able to provide numbers to support this hand-waving and tongue-wagging. I would like to demonstrate mathematically, that Silver is one of the fastest moving investments in the universe and still gaining velocity. It would help my explanation, if we had an idea of what that high-school Newtonian Equation (NE) was really all about. Well, let me just shift my huge, and 90% under-utilized Nerd Brain into second gear…the NE is all about existential and relativistic, determination of time and spatially distributed vector coordinates. Isn't it? More simply, an equation can tell an object's Position over any given Time. A Mathie would say that Position is a function of Time, or P = F(T). The "Function" is just a whole bunch of things that we already know or can measure. POSITION. The first thing we need is an Initial Position. Newton said, "An object at rest tends to stay at rest, (unless acted upon by an external force)". Remember that? Everything has a position. We can measure an object's position many ways. We measure a rocket's altitude in meters above the earth. We measure Silver in terms of US dollars required to buy an ounce. Most people think that the Bull Market in Silver started at its lowest $ position a little over two years ago, and maybe that's true by definition of a Bull Market; however, the Silver Rocket actually started long before that. Trust me, you'll see why in a bit. Five years ago, Silver traded at around $5.20 US, when Gold was a "barbarous relic" and Fort Knox may still have actually contained a few ounces of Precious Metals, instead of all those gray-green, cardboard storage boxes full of little pink IOUs. Let's assume for now, that $5.20, five years back, is an approximate initial position. What else does a Newtonian function use? Oh yeah… VELOCITY. Five years ago, the Silver Rocket - no one called it that back then - was falling out of the sky. If it was a rocket, it had a bad thruster problem. It had big-time negative Velocity. It had fallen from the 1998 highs around $8.00 and hadn't yet hit bottom. It took another two years and seven months, to finally reach its average monthly low of $4.17. At this point, the POS velocity was zero. The Silver Chart at this point was gong sideways, and silver was going nowhere fast. Think about that though…from its negative initial velocity, some force must have been acting on the POS to slow down its decent. And here's the start of the interesting bit…when the POS hit the bottom, it was already Accelerating - in the Newtonian sense. The velocity of Silver started changing positively (less negatively), as the POS was still falling in 1998-1999. Yes, more than five years ago as the Silver Rocket was plunging to earth, the big jets first ignited. ACCELERATION. Acceleration is simply a change in velocity. It can be easily measured. Remember the equation F=MA? That equation, Force = Mass times Acceleration, really just means that when you apply a constant force to a moveable object - anything at all - the object changes it's velocity proportionally to the force exerted. It accelerates. It's velocity changes and changes and changes, faster and faster…until you remove the Force. That's what happens when you turn on the jets of a Rocket. The force of the burning fuel causes acceleration. That's what happened to Silver more than 5 years ago as it was plunging to earth. A positive force was applied - for now, let's call it the SMART Force. That force has not only continued to this day, but as we will see, the SMART Force has been continually increasing over the last 5 years!. Yes, Silver's velocity AND acceleration are both still increasing! Like a Rocket, fighting against the earth's gravity. The higher it flies, the less is the pull of gravity, and the smaller becomes the drag of friction. Acceleration - the change in Silver Price Velocity - increases. It all boils down to a single Newtonian Function. I call this is the SMART Silver Equation. Assume that the price Position of Silver, like the vertical height of a rocket above the earth, can be expressed by an equation. The position P in any month (m) would depend upon five factors: 1. The initial position (I). 2. The initial velocity (V). 3. The acceleration (A). 4. The change in acceleration (Q). 5. The time which I express in months (m). My Newtonian equation looks like this, (my apologies to Isaac): P = I + (V * m) + (A * m * m) + (Q * m * m * m). Now I put all the monthly Silver Prices for the last 5 years into a file and write a simple program which reads the Silver price file and finds the best values of I, V, A, and Q that make the equation come closest to the real averaged monthly Silver values. This is called the "Least Squares Regression Analysis". It's a tricky bit of Black Art in some places, and there is a certain amount of engineering poetic license involved, for example in choosing methods of averaging and some of the program parameters, but I guarantee that I've been more honest than any government accountant you ever met. And after the program is written, I just bung in the data, click the mouse and Bob's-your-Uncle…out comes the numbers! This is the Silver Equation that my program comes up with: I = $5.20 - This is the initial Silver price my program calculated about 60 months ago, based on averaged monthly Kitco silver data I downloaded. V = minus $0.052 per month - This is Silver's initial price Velocity at Time=0. The minus sign says that the price was moving down initially, at an approximate average rate of 5.2 cents per month - a rocket, or NASA's newest satellite, falling from the sky. A = $.000000014 per month per month - An initial SMART Force is acting to push the price positively and is changing the velocity by this rate every month. This is a very, very, very small initial acceleration, but every forest-fire starts with a single spark! It's true that small number gets multiplied by the square of the number-of-months, and so the velocity begins to change more quickly as the month (m) increases, but even with that, this number is too puny to be important. It’s the next one that rocks! Q = $0.000029 per month per month per month - This is it! The SMART Acceleration may start tiny, but it's increasing at a rate that is four orders of magnitude (powers of ten) larger than the initial acceleration. The acceleration is changing by this rate every month. Thus, the $ velocity changes faster and faster every month. This Q number is multiplied by the cube of the number-of-months parameter (m), so it increases very fast indeed!
This is what it looks like on a graph.
Notice that at first the velocity changes very slowly, but it soon begins to pick up more and more acceleration. The Force is growing stronger and stronger month by month. The "best fit curve" clearly shows that Silver is following the SMART trajectory that it started 5 years ago! The curve predicts that the POS will double in less than two years - if it stays upon the path. Aren't cold, hard facts interesting! But here's the kicker. And here's where I have to get all hand-wavy and opinionated again. Do I think it will stay on the path? It might… but my belief is "NO", I don't think it can stay upon this path. WHAT!!! Sorry, but this curve extrapolation is probably just an exercise in futility like much of life. The conclusion I draw, from the data, and from what I'm reading, is that the curve can't possibly continue that long… The chart can only show graphically that there is and has been an ever-increasing, SMART Force driving the POS. The problem with curves like this is that past performance can never fully predict the future. We need logic and experience to assess the outcome. Unfortunately, we don't have much of that, but I do have a few mystical thoughts. 1. The SMART Force will continue to increase until there is a severe physical Silver shortage, and the POS will then increase dramatically. Start with a small, dwindling Supply. Subtract a constantly growing Industrial Demand, (which already exceeds the Supply), then from this you subtract an ever accelerating amount of Investment Demand. Guess what? Eventually, you run out. Duh! 2. I think that anyone who says that an upward spike in the silver price today, will reverse and be over just as quickly as it was in the early 80's is being grossly illogical. There are no stockpiles left to sell as there were in the 80's! These accelerating forces of Silver accumulation will not subside until the price drives new exploration, discovery, and renewed supply. When there is a shortage of supply, people tend to build stockpiles which will further support prices. Stockpiles won't be rebuilt quickly. Perhaps towards the end of the next decade! 3. I think that people who refuse to consider that any kind of conspiracies could exist whatsoever, and dismiss such with a casual, condescending wink and a trivial turn of phrase, must have slept through 9/11, the second World War, the Russian, American and French revolutions, athlete doping, and Enron, not to mention a thousand government coups, the Rothschild fortune, and the takeover of American Justice, Dollar, Freedom and Democracy by the Banks, Big Business, and Big Media. Conspiracies not only exist. They are the norm, wherever and whenever meetings happen behind closed doors. Otherwise, the doors would be open. The difference between wealthy and poor is that the wealthy can keep a secret. 4. I think it doesn't take, as some suggest, a huge wave of speculation by the general populace to bid up the Silver market to the breaking point. It only takes a very small percentage of savvy investors with some free cash, trying to escape the wealth-destroying monster of Inflation. I suspect that there are more than enough SMART investors with cash, judging by the huge amounts of insider stock market selling we have seen over the past year by rich North American executives. The cash proceeds of these insider stock sales have produced many times the necessary funds to power Silver and Gold as well. I suspect many wealthy investors are at this very moment, waiting for the "signal" or are already quietly accumulating. Perhaps the “signal” will happen when the USD index crosses below its 200 day moving average! 5. At these artificially low Silver prices, created by 30 years selling off precious above-ground stockpiles, and closing down mines, it takes so little money to buy the remaining above-ground supplies of silver, that a single large investor could in fact do it tomorrow afternoon, and still have enough left over to buy Air Canada - though why anyone would want AC, I can't imagine. The total current COMEX warehouse Silver stocks - which have incidentally fallen dramatically over the last two months - could all be purchased for around a billion dollars Canadian! (if all those ounces were available for sale). What would happen to our rocket ship then? Warp 9, Captain? The di-lithium crystals canna take much more! 6. The SMART Force is evidenced by heavy attendance at Precious Metals conferences, the myriad fully subscribed junior mining ventures, and the recent PM purchases by many of the world's well-known, elite investors. Final Destination? Silver has been used as money for thousands of years. So have Copper, Gold, and Tulip bulbs. The world will pick as money, any of those things which are - if only for the moment - most rare and most valuable. If Tulip bulbs could command a price higher than Gold, then why could not Silver? Silver is after all, even more rare than gold at this particular moment in time, and soon might be more hard to buy than tulip bulbs were in their glory days. There is an awful lot of Gold in bullion warehouses, which can be brought to market if the price increases significantly. This is not true of silver. When the Hunts tried to corner the market in the 80s, what were they thinking? There were billions of ounces of silver above ground available to be sold. You can't corner the grain market when there are silos full of it. Today however, no matter how high the Silver Rocket flies, there will continue to be a dwindling above ground supply of Silver for years to come. No doubt the price will overshoot the steady-state “fair’ price by quite a bit, but you will not see these current price levels in Silver ever again. In 3500 BC, silver was comparatively rare with respect to gold. With continued Silver investment, increased industrial use, hoarding, mine depletion, and finally rebuilding of private and national stockpiles, it is not a huge stretch of my imagination to envisage the ancient Gold-Silver ratio again - at three or less! Remember, Newton's First Law, "An object in motion tends to stay in motion". Rock on! rockgale@yahoo.ca September 20, 2004 PS: I currently own Silver bullion, as well as Silver and Gold shares. Do not believe anything I say. I am highly biased, easily swayed, and many have said, legally insane.
-- Posted 1 October, 2004 | |
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