Why Long-Term Silver Bulls Are in Good Shape

Following record highs set Friday gold, silver and a host of other metals are taking a dive this morning. From Friday’s record close, gold is down $63 to $1,514.

Silver is down over $10… nearly 20%.

More than a third of silver’s tumble came yesterday when it gave back $3.50 an ounce, to $41 and change. Yesterday was the worst one-day drubbing since the grey metal’s epic fall from $50 in 1980.

Silver’s given back a couple more bucks this morning…

The correction coincides with the Chicago Mercantile Exchange’s third move in a week to increase margin requirements for traders.

“The heightened requirement is to ensure all trading parties are adequately capitalized for any price change,” explains our resident pit trader Alan Knuckman, “The ones that get forced out by the new greater deposit mandates are typically on the wrong side of the market and hoping things change to make up losses.

“At present levels, a silver contract has a cash value of over $200,000 that is controlled by a deposit of typically only 10% or so. When prices have a 6-cent move, like we have seen, that translates into $30,000 between the daily high and low based on one standardized 5,000-ounce-size silver contract.”

Silver topped at $50 in 1980. Today, adjusted for inflation, that would be $143.

Of course, that figure grants the Bureau of Labor Statistics the right to geometrically weight, hedonically fudge and substitute all kinds of skewed figures to get their numbers. If you used the consumer index, as the old school wonks did back in 1980 — and as our friend and contemporary wonk John Williams at Shadow Stats still does — you’d be looking at a silver price of $490.

Heh. Seriously.

We’d be surprised to see silver reach $490, wouldn’t you?

Still, there’s ample headroom between the current silver price and the inflation-adjusted record. Long term, if you’re a silver bull, the odds are on your side, even if it pulls back some more in the short term.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning