05/24/11 We buy gold and silver as a way to protect ourselves from the TEOMSAWKI (The End Of The Monetary System As We Know It) to come.
We live in a literal financial house of cards. It is all paper. That house of cards has been in the process of collapsing since 2008. Astute market participants realize this and are buying bullion, one of the only financial assets with no counterparty risk, as a way to protect themselves from the coming storm.
Silver has more than doubled since Ben Bernanke began his high level terrorist attacks against the US dollar with “Quantitative Easing II,” announced in August of last year. Silver jumped from $18 to nearly $50.
The rise in gold and silver was likely making Bernanke feel a bit uncomfortable about his “there is no inflation” story and a phone call was likely put into the COMEX. Five margin increases in rapid succession later, and the COMEX had increased initial margin requirements by a substantial 84%.
Therefore, anyone who had purchased silver futures using leverage was forced to pony up a lot more cash to maintain the position…or sell out. Since many participants lacked the necessary cash, they were forced to immediately sell their silver futures. The result was a drop in silver futures prices from near $49 to below $34 in a matter of days.
This volatile rise and fall in silver has most of the world saying that silver was in a bubble and now that bubble has popped. Those who say this don’t know what a bubble is.
If you look at the silver price in US dollar terms, its recent spike does look quite parabolic, or bubble-like. However, in the context of a longer-term timeframe, silver’s recent run-up doesn’t seem bubble-like at all.
Check out the chart below, which details the price increase of various items since 1980. Can you spot which one of these items is in a bubble? Hint: It is not silver!
In nominal dollar terms, silver’s recent rally looks parabolic and unsustainable. But when compared to other assets over the last thirty years, silver has been in a very long bear market and has done relatively nothing compared to any other assets.
And compared to the growth in US Federal Government debt, silver has underperformed by a factor of five. One bubble is about to pop… and it isn’t silver.
Regards,
Jeff Berwick,
for The Daily Reckoning
Jeff Berwick
Jeff Berwick, a self-described financial freedom fighter, is the founder of Canada’s largest financial website, Stockhouse.com. He now writes the libertarian, Austrian-economics based newsletter, The Dollar Vigilante and is a regular speaker at many of the world’s most important investment, resource and freedom-focused conferences where he is known as the most dangerous man in finance.
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Nice chart, but you are comparing apples and oranges.
For all the “stuff,” you are comparing 2010 vs. 1980 prices.
But for the gov’t debt, you are comparing the quantity outstanding.
Very insightful article, and one worth heeding for anyone who thinks the market behavior of 1980 will be replayed verbatim this time around.
I would, however, beg to differ on the observation about paper money. Virtually none of it is paper, –most of it is in the form of magnetic blips spinning around at 15,000 RPM on a disk inside some data center.
The coming storms would not be on but very much above par with the recent tornado series swept across the continent. Lend a ear to the doomsayer.
Strong currencies are pegged to many many basket of other strengthened currencies. So what! After all they remain belong to the paper family.
“Since many participants lacked the necessary cash they were forced to sell their silver futures…” – gee that doesn`t sound like a fundamentally strong market to me. Sound more like the leveraged house market before the crash.
This smack down of precious metals was presaged by a magazine saying we ought to adopt a metals based currency. Immediately thereafter silver was knocked down by 25%. The government’s flunkies all sang along that this was a bubble popping, hoping to get investors to dump their holdings, to help the government.
But punishing short sellers by raising the margin call to force them to sell on cue is going to burn them from short selling again. That trick will never work again.
Meanwhile China is buying low, knowing this is artificial. The Renminbi now has more reserves to promote it to be the next world currency. And they still remember our part in the Boxer Rebellion.
HalfAsleep1 – I was going to leave the same comment.
beware! this chart (and article) is fake. the gold and silver prices are given for 1980, when both silver and gold prices were very high. Compare to gold at $200 in 2002 and silver at $4 at 2002!