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Thanks
to its awesome autumn rally, silver has become something of a rock star in
the commodities world. Investors and speculators alike are enthralled with
this white metal. But with it just hitting new 30-year highs, many on
Wall Street suspect silver is stretching to bull-ending extremes. However
once silver's modern history is recast into real inflation-adjusted terms,
this metal's secular bull is still looking young.
For
any long-term price comparisons, over a decade, adjusting for inflation is
absolutely essential. The US Federal Reserve is constantly creating
new fiat dollars out of thin air, cheapening all the other ones already in
existence. When the money supply grows faster than the pool of goods,
services, and investments on which to spend it, nominal prices rise.
Relatively more dollars compete for relatively fewer things to buy, driving
up prices.
You
may be old enough to remember 1980, the end of silver's last secular bull.
Back when silver hit its all-time nominal (not inflation-adjusted) high of
$48 per ounce, the US median household income was under $18k. Across
the nation, new houses averaged just $76k while new cars ran less than $6k! A
candy bar went for a quarter. Obviously a dollar back then went a lot farther
than a dollar today. The Fed's inflation since has relentlessly eroded each
dollar's real (inflation-adjusted) purchasing power.
So
comparing $30 silver today to $48 silver in January 1980 is grossly
misleading, it isn't even close to being an apples-to-apples comparison. We
have to adjust past prices for inflation in order to see them rendered in
today's dollars, which are the only dollars we really understand. The purest
way to do this is to adjust past prices for growth in the Fed's money supply,
minus real economic growth. If money ramps by 8% and the US
economy grows by 3% in any given year, then actual inflation is
probably close to 5%.
But
unfortunately using raw money supplies as inflation proxies is seen as too
aggressive by mainstream analysts. Whenever I do analytical work, I always
try to use the most conservative approach possible. That way when someone
replicates my research and runs the data themselves, they actually find my
numbers are quite conservative. Understating your case tends to
increase your credibility.
Wall
Street still believes Washington's creative fiction known as the Consumer
Price Index is the definitive inflation gauge. The CPI is horribly
flawed on all kinds of fronts. It adjusts out most food and energy prices,
the most important things we all buy. It uses so-called "hedonic
deflators" that average away rising prices behind the facade of
quality-of-life issues. For example, if a computer that once cost $3000 now
costs $500, it must be 6x as useful, right? All
these manipulations lowball reported inflation.
And
Washington has good cause to minimize the reported CPI. Higher CPI reads
scare the stock markets, leading to selloffs that agitate voters. They force
the government to pay higher welfare payments which leaves less money for
politicians to spend on their pet projects. They drive up interest rates,
which forces Washington to pay more on its gargantuan long-term debt. They
alert Americans to the predatory stealth tax on our savings that monetary
inflation is. So the government wants the lowest CPI possible.
Though
this index has always seriously understated true inflation in our
economy, I always use it in my inflation-adjusted historical research. If I
didn't, mainstream investors and Wall Street analysts would instantly dismiss
my work as radical-fringe stuff. But since the CPI is so conservative,
everyone has to take real prices viewed through its lens seriously. So these
silver charts are all inflated by the CPI.
While
silver's bull run since late 2001 has been impressive, when rendered in real
terms it looks positively tiny compared to silver's last secular bull
in the 1970s. The blue line below is CPI-adjusted real silver, while the
light-red line is raw nominal silver prices for comparison. Is $30 silver in
today's dollars super-high in historical context? Hardly! Even now this metal
has only started to crawl up its real chart.
On
January 21st, 1980 at its all-time high, $48 silver translates into $135 in
today's dollars. In other words, it would take $135 today to equal the
purchasing power of $48 three decades ago. Per the lowballed
CPI, it takes 2.81 dollars now to buy what a single dollar bought then. You
can thank the Federal Reserve for this enormous stealth tax that has
eroded all the capital you have saved ever since.
$30
silver today is only 22% of the way to matching its blowoff
parabolic top at the end of its last secular bull in early 1980. Considered
another way, silver would have to soar 350% from today's levels before
it could exceed its all-time high! So while $30 certainly feels high
compared to recent years' silver-price history, compared to the end of a
mighty secular bull it is actually relatively low.
Silver
stayed above $30 real more or less continuously between August 1979 and April
1981! Any price that persists for 19 months is nowhere close to being
a bull-killing topping level. The popular mania that drove silver
stratospheric in late 1979 saw it exceed $100 real on just 20 trading days,
and it closed over $125 in today's dollars on only 4 days. All the Wall
Street arguments implying today's $30 is so high that silver's bull has to be
over are just plain incorrect, historically myopic.
Nevertheless,
silver is sure not cheap today at $30 either. By its own
bull-to-date
standards, silver has been super-overbought continuously since early
November. It surged then when the Fed announced it was monetizing vastly more
US Treasuries, or creating new dollars out of thin air to buy Washington's
debt. Being stretched so high on a short-term basis means a typical sharp
silver correction is highly likely. These healthy retreats are usually big
and fast, lopping 1/4th to 1/3rd off silver prices in less than 6 weeks!
So
while you can't use this long-term real chart to ignore silver's overbought technicals, you can sure use it to show silver's secular
bull is nowhere close to extreme yet. While silver did rally 76% between
July and December 2010, no mean feat, this recent upleg
looked nothing like a popular-mania parabolic blowoff.
Between August 1979 and January 1980, a similar 5-month span, silver
skyrocketed 450% higher! There is just no possible comparison between
that legendary parabola and 2010's autumn rally.
Whenever
I delve into real silver, I can't resist looking at that 1970s superbull rendered in today's dollars. While silver is
indeed a great investment during a secular precious-metals bull, the memories
of what really happened in the 1970s have been seriously distorted. Silver
enthusiasts, usually inadvertently but sometimes intentionally, tend to
misrepresent exactly how that last secular bull played out.
Why
does silver have such a powerful allure today? One major reason is this metal
soared 3627% in nominal terms between November 1971 ($1.29 per ounce, $6.89
in today's dollars) and January 1980! A 37.3x multiplication of one's
capital, for a single trade in one secular bull, is certainly mind-blowingly epic. What investor or speculator doesn't dream
about such gargantuan returns?
Unfortunately
though, the passage of time has blurred how these gains actually played out.
They certainly weren't nice and smooth, with silver rising every year like
clockwork. The red percentages above, showing silver's nominal calendar-year
returns, really highlight its last secular bull's erratic nature. Most of its
entire gains were won in just two brief parabolic ascents, early 1974 and
late 1979.
Due
to the precious-metals summer
doldrums, a phenomenon driven by the great seasonal variance in gold
investment demand, silver tends to bottom in the late summer. In 1973 this
low came a little late, $2.55 ($12.34 real) in mid-September. After that it
was off to the races. By late February 1974, silver had soared 163% to $6.70
per ounce ($31.06 real). So by the end of that initial parabola, fully
3/4ths of silver's entire bull's gains to that point were won in just the
final 5 months out of a 27-month bull!
One
of the things all silver investors have to realize is its gains are not
comfortably smooth, but highly erratic. Most happen over very-short periods
of time, and then silver really tests investors' patience by drifting
listlessly for long periods of time between these spikes. After that
early-1974 parabolic spike, silver flatlined for 4
to 5+ years depending on how you measure it. It didn't again exceed
February 1974's real high until August 1979!
And
then another similar big-gains streak emerged, but at a vastly larger
scale. Silver bottomed at $8.74 ($25.90 real) in August 1979. Over the next 5
months it shot 450% higher to its all-time high of $48.00 ($134.99 in
today's dollars). So though silver's famous 1970s secular bull lasted for
over 8 years, a whopping 5/6ths of its entire gains accrued in just the
final 5 months alone! Silver really wasn't exciting at all for most of
the 1970s, an exceedingly-important truth that is rarely considered today.
I'm
a big silver fan. I first recommended physical-silver coins to our
subscribers as long-term investments back in November 2001 when silver was
languishing at $4.20 per ounce. In our flagship Zeal Intelligence monthly
newsletter, the 48 silver-stock trades we've closed since 2002 have averaged
annualized realized gains of +54.1%. I've written dozens of essays on
silver and silver stocks over the last decade, helping investors and
speculators win huge profits trading this volatile metal.
But
silver always has been, and always will be, super-risky. Investors and
speculators need to fully understand what they are getting in to. In some
fringe circles, silver is venerated to the point of worship. I've talked with
a surprising number of investors over the years who own nothing but silver,
they are fanatical in their devotion. I admire their zeal and commitment, but
if often leads to greatly minimizing silver's risks while wildly overstating
its potential rewards, misleading new silver investors.
Silver's
bull-market gains are spiky, fairly-rare fast surges surrounded by
vast seas of long and boring consolidations. It requires a great deal of
patience, and a very high tolerance for extreme volatility, to harness those
episodes when silver is finally surging. You can own silver (and to a lesser
extent silver stocks) for literally years without seeing anything much
happen. And then the silver complex can suddenly rocket up so fast that your
total gains far exceed the opportunity costs of the long wait.
Thankfully
silver's current secular bull, while still very volatile and
psychologically-trying, has been much more consistent so far than its 1970s
ancestor. While we still see periodic parabolic surges where all the gains
happen surrounded by barren wastelands of consolidations, silver's advance is
much more evenly-paced this time around. Check out silver's annual returns
below compared to the 1970s ones above.
Silver's
2000s secular bull has seen its characteristic parabolic surges much more
often than in the 1970s. There are more spiking episodes with less
consolidation time between them, a welcome change. And other than that wild
stock-panic year of 2008, silver's calendar-year returns have been much
tighter and less erratic than they were in the 1970s. The standard deviation
of these annual gains has plunged.
I
suspect a major driver of this smoother bull run is technology, acting on
silver from multiple fronts. The Internet makes it far easier for new
investors to learn about silver today than in the 1970s. Back then, you
either had to personally know someone who already invested in silver or
subscribe to a relatively-obscure financial newsletter to get information on
this metal. Today, anyone with a computer can easily learn about this silver
bull, its underlying fundamentals, and how to profitably invest in it.
In
addition, silver investment is far easier now thanks to technology. While I
prefer physical coins personally, most investors can't be bothered with their
high transaction costs. They don't want to search for an honorable local coin
dealer, figure out what kind of silver to buy, and pay the high premiums
necessary to purchase coins. For these more-mainstream investors, the SLV silver ETF
has been a godsend. It gives them instant silver exposure for trivial
commissions, and they can efficiently enter and exit as often as they want.
SLV
was born in April 2006, with just 21m ounces of silver held in trust for its
shareholders. As expected, it opened up a huge new conduit for traditional
stock-market capital to flow into silver bullion. The more stock investors
who buy SLV, the more silver this ETF's custodians have to purchase to shunt
this excess buying pressure directly into the underlying physical metal
itself. Last month, SLV's holdings hit a new record high approaching 353m
ounces!
To
put this into perspective, global silver production in 2009 ran about 700m
ounces. Stock investors' vast capital has already absorbed half a year's
worth of global silver production in the primary US silver ETF alone!
This new source of capital has accelerated this silver bull while making it
much more consistent than the 1970s one, because the dollar inflows are more
constant. While silver is still spiky, so far it has been less so in today's
bull.
And
up just 660% so far in nominal terms, today's silver bull is nowhere near the
extreme +3627% seen in the 1970s bull. This is another indication that this
secular bull is much younger than Wall Street thinks. Secular bulls don't
end, and shoot parabolic, until the general public is totally enamored
with their underlying assets. We certainly haven't seen anything remotely
like this in silver yet. To visualize a popular mania, think the technology
stocks in late 1999 and early 2000.
Once
the general public gets involved and feeds a mania, all everyone talks about
is that hot asset. People who have never invested before sell stuff and
mortgage their houses to raise cash to plow into the mania. Waiters and
housewives and people never interested in the markets before eagerly brag
about how well their new investments are doing. Today silver is nowhere close
to being popular among mainstream Americans. I bet less than 10% of
investors own any, let alone the non-investing public.
In
real inflation-adjusted terms, $30 is simply not extreme at all. This
buttresses some research I did a few weeks ago looking at silver's
"valuation" relative
to gold. Interestingly at today's gold prices, $30 silver is perfectly
reasonable based on the strong historical relationship between these two
precious metals. So all the Wall Street talk about silver's bull being over
because it hit 30-year nominal highs is uninformed at best. In historical
context, today's silver prices aren't excessive at all.
That
being said, silver is indeed very overbought
on a short-term technical basis. A healthy pullback or correction is highly
likely. Far from being a bad thing, this will create outstanding buying
opportunities in silver stocks. Since silver can easily fall by a quarter or
even a third in a matter of weeks, great silver stocks often plunge by half
or more during the sharpest silver corrections. This leads to some the best
buying opportunities, the lowest silver-stock prices, ever seen within
ongoing secular silver bulls.
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Zeal we recently finished a 3-month deep-research project looking for the
elite silver stocks with the best fundamental prospects. We started with the
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The
bottom line is despite silver's big autumn rally, this metal really isn't
that high yet in inflation-adjusted historical context. When rendered in
current dollars, silver spent 19 months above today's levels around the end
of its last secular bull. While silver certainly isn't cheap at $30, neither
is it anywhere close to bull-killing levels in real terms. An
apples-to-apples comparison suggests today's silver bull remains young.
And
even if the climax of this secular bull isn't quite as massive as the
late-1970s parabola for some reason, silver still has plenty of room to run
higher. It could double or even triple from here, and still not get
anywhere close to its all-time real high. Based on silver's true
inflation-adjusted history, $30 is just not that big of a deal at all.
Nominal price comparisons across decades are myopic and misleading.
Adam Hamilton,
CPA
Zealllc.com
So how can you
profit from this information? We publish an acclaimed monthly
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that details exactly what we are doing in terms of actual stock and options
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Questions for
Adam? I would be more than happy to address them through my
private consulting business. Please visit www.zealllc.com/adam.htm for
more information.
Thoughts,
comments, or flames? Fire away at zelotes@zealllc.com.
Due to my staggering and perpetually increasing e-mail load, I regret that I
am not able to respond to comments personally. I will read all messages
though and really appreciate your feedback!
Copyright 2000
- 2006 Zeal Research (www.ZealLLC.com)
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