-- Posted 1 April, 2011 | | Discuss This Article - Comments:

Is silver in a bubble?  In our opinion; no.  But what can we learn from past bubbles?  There are many ways to detect an investment bubble including extreme positive market sentiment, outrageous demand and speculation, widespread mainstream acceptance that the investment is a “sure thing” etc.  In this article we would like to focus on the big picture perspective of a markets price performance.

The above chart clearly illustrates what a genuine, parabolic, investment mania, or bubble, can look like.  Note the following:

1)    The “mega spike” climbed to about 4,572 which is about an 82 fold increase from its low.  That is an increase of 8,200% without including dividends.

2)    All previous highs are not even close to the ultimate blow off high.

3)    In 1992 the Nasdaq was up a whopping 11 fold and it appeared to be in the process of putting in a parabolic blow off spike. 

This chart helps illustrate what the massive 11 fold run up would have looked like in 1992.  From this perspective it may have been reasonable to expect a bubble and exit all positions.  However, our first chart illustrates that the Nasdaq later powered higher to a remarkable 82 fold climb from its 1992 high.

This is a current chart of silver which illustrates the remarkable parabolic spike we are witnessing today.  There are many similarities between this spike and the Nasdaq mid bull market spike.  From today’s perspective one may wonder how the price of silver could possible go any higher.  However, as the Nasdaq chart illustrated above, it is possible for a market to head much higher and reach extreme bubble status.

In the above chart you will notice that Silver has not hit a new all time high.  The Nasdaq bubble popped with an extreme all time high that dwarfed any pervious tops.  You will notice that in the 1970 – 1980 bull market run, silver’s 1980 top towers over any previous highs.  There are many other signs that the silver market is not currently in a bubble such as the dismal underperformance of the silver mining shares. 

All of these charts and explanations are very exciting for the potential of the Silver bull market.  We believe that silver is destined to hit much higher numbers in the future, but there is another reality of this chart that we would like to point out.

When we look at the how Silver advances in the chart above, we notice that it tends to spike up and quickly fall back down.  Additionally, we know that precious metals in a bull market have the potential to have extreme down turns such as the fifty percent multi-year correction in the 1970’s gold bull.  A look back to 2008 reminds us of the massive volatility in these markets.  The reality is that silver is spiking and history would suggest that this can be a very high risk period to put new capital to work in these markets.  It is entirely possible that a significant intermediate term correction lies ahead of silver and prior to the final mega blow off that we believe is coming.  We don’t think silver is currently in a bubble but that does not mean it can’t wipe out a significant number of over confident bulls who are throwing fresh new capital into this spike.  Silver has climbed from $9 to $38 in only a few years and that pace is not going to last indefinitely. 

At investmentscore.com we look at the large overall picture of these markets to gain insight of the macro market movements.  We compare markets to one another and try to bypass the distortions of the fluctuating US dollar measuring stick.  To sign up for our free newsletter and to learn more about our strategy we invite you to visit us at www.investmentscore.com.

April 1, 2011 

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