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Adjusted for inflation since 1980, silver prices should be trading at roughly $128 an ounce.
Should be? Seriously? Silver was one of the biggest bubbles of the past century back in 1980. It's like saying that the Nasdaq should currently be trading at 6500 in inflation adjusted dollars. Good luck on that one.
There's nothing quite like cherry picking the starting point in order to sway your audience though. The peak may have been $128 an ounce in 1980 (I can't say), but the average price for silver that year was an inflation adjusted $55.
Other than a silver bug, who really thinks silver will go back to that inflation adjusted high? It would be interesting to see how many trigger fingers would hover over the "sell" button just before it though, assuming it could even get that close.
650 Years of Silver Prices
If the plan is to be overly optimistic, then why not go all the way? Silver peaked at an inflation adjusted $1,081 per ounce in 1477. I'm using the $806 all time high as seen in 1998 dollars and then converting those dollars to 2010 dollars.
Please note the 99.3% loss in purchasing power from 1477 ($806 per ounce) to 1998 ($5.55 per ounce). That's the kind of thing I thought about when I owned silver from 2004 to 2006. I had many, many concerns. Modern mining equipment? Mr. Fusion? Not once did I think my silver investment was a sure thing.
Remember this tip, though – one that goes for any investment: When everyone is talking about a sure thing, be skeptical and diversify. For example, Abu Dhabi’s Emirates Palace Hotel recently opened a vending machine that dispenses gold bars! Choose your investments carefully and be sure to distribute your capital into other hedges like cash, silver and oil.
That's considered diversifying? You add two other "sure things" to your one "sure thing" and then park the rest in cash?
Let's say you retired in 1980. That's the date we're told to concentrate on. Had you "diversified" your nest egg by burying gold, cash, silver, and oil in your backyard at that time, then you could have been financially ruined over the following 20 years. Not one of those four things kept up with inflation. Not even close. As seen in the chart below, the ride down in silver would have been especially brutal.
Click to enlarge.
Note that silver is now nearly 4x more expensive than its long-term inflation adjusted median price (using annual data from 1913 to 2008). I opted to use the median price instead of the average price to better take into account the 1980 bubble. Medians do a good job of stripping out spikes in the data. I think you can see that in the chart. The red line is a reasonably good fit.
In my opinion, silver is now in crazy tin foil hat territory. I have no idea how long it can stay there or how much higher it can/will go but I can say this. I am a believer in a return to the mean/median someday.
This does not necessarily mean I think that inflation will remain tame. I'm simply saying that there is serious risk that silver will not keep up with inflation long-term if bought at these levels. If one must buy silver at these prices, then at least consider hoarding some toilet paper to go with it. Toilet paper hasn't been bid up by speculators with potentially itchy trigger fingers and get rich quick hopes and dreams. As a hoarder of toilet paper, I can say that with 100% certainty.
It is certainly possible that the world is running out of energy, oil, gold, silver, copper, and so on, and so on. It is also quite possible that the Fed is blowing bubbles again. I think you can guess where I stand on that. They wanted us to take on more risk in order to prop up prices again. I'll pass. It just never seems to end all that well. The popping of each bubble is a complete surprise of course. Few ever seem to see it coming.
And lastly, I'm told to be excited about the stock market again and how fantastic our recovery is going (as seen on CNBC). However, I will repeat what I've been saying since the beginning. I am not a believer in commodity driven stock markets. Show me a stock market that is rising without oil rising someday and then perhaps I will be interested. Oh please let it be Mr. Fusion. Now that would be something to cheer about.
Source Data:
USGS: Historical Mineral Prices
Kitco: Silver
BLS: Historical CPI
11 comments:
Mark,
I have to admit I think things are really weird right now and you know where I stand on the metals debate! I actually think if inflation picks UP the metals will go down but that may well be a minority opinion at this point. I think I will be right. But inflation may not pick up so....who knows.
I saw krispy kreme (KKD) today go parabolic on a miniscule earnings beat and so anything is possible in this fantasy land market we have. No wonder I have stopped posting heavy stuff for a while!
I am not a believer in commodity driven stock markets.
I agree. I'd add that I'm not a believer in deflation driven stock markets either.
The PDCF was implemented to keep the leveraged air in the stock market. Nature abhors a vacuum and that air desperately wants to get out. It might be a sudden pop, it might be a slow leak.
I'll buy stocks when CNBC gives up the ghost on stocks.
GYSC,
For what it is worth, I think silver would have plenty more room to run if inflation did pick up.
However, I don't think that run will ultimately be sustainable. I do expect to see silver prices and toilet paper prices meet up somewhere in the middle someday.
In other words, I do not think silver at these prices is a very good way to hedge against long-term toilet paper price increases, nor do I think silver will now be a good long-term hedge against medical costs.
Could be wrong of course. I can't say with certainty that the world is not running out of silver. I do know that I lean towards an old mining joke though.
"A mine is a hole in the ground with a liar standing over it."
It's simliar to...
"A house is a financial hole above the ground with a chief economist from the NAR standing in front of it."
Hahaha! Sigh.
I'm pretty much skeptical about everything. It has served me rather well over the years. Perhaps that's why many get more cynical as they get older. Practice makes perfect! ;)
mab,
"I agree. I'd add that I'm not a believer in deflation driven stock markets either."
Indeed. Those deflation driven stock markets are a real bear!
Cramer: 3 factors will keep stocks rallying
You need three things to keep the rally going: confidence, as in confidence in the world's central bankers; growth, and I mean growth in all countries including the United States; and compromise, as in the certainty of a deal on unemployment benefits and taxes. By the way, the certainty of the compromise is, in a way, more important than the terms of the compromise.
I woke up this morning thinking that maybe the DJIA could hit 14,000 before the rally faded back into more doom and gloom. I figured I'd ride it out on the sidelines again, just like last time.
Confidence in the world's central bankers? Growth in *all* countries? And compromise? We need all three of them? Seriously? Oh oh.
As a side note, I love the "certainty of the compromise" being more important than the "terms of the compromise" part. That's priceless.
If true, perhaps they can simply agree not to agree. That's certainly a form of compromise!
Hey, I can't explain how his mind works. I can only observe results from the outside and try to come up with theories.
I had a dog once that stared at the floor one day. Her head was turning very slowly. I walked over to see what the heck she was doing. It turns out that she was watching an ant walk across the carpet. I don't know why I even bring it up.
Mark,
yeah you may be right, but I am getting a feeling of a dynamic that this unending crisis crap pushes assets higher no matter what they are. The new normal (looking out 5 years) may be nothing is ok, panic is omnipresent, but of course not really. Maybe I am crazy.
Don't answer that last one!
My verification word is systos which is almost Kryptos!
"Hey, I can't explain how his mind works....I don't know why I even bring it up."
I hear that.
7 Changes to Bring Small Investors Back
"The average investor just doesn’t trust the market, it seems, Cramer said...He acknowledged that the stock market can seem dangerous, but said it’s the best way to supplement your paycheck."
This should come as a relief to millions of unemployed Americans. Just think, they can expect exactly the same returns on their stock market investments as they are getting from their paychecks.
"Cramer wants the Securities and Exchange Commission to be outfitted with 50,000 new employees, who would “ferret out white collar crime [and] make sure that your money’s safe when you put it in the market.”"
Fantastic, he wants to increase the size of the SEC twelve-fold. Is this so that they will be twelve times more accomplished to run interference for the criminal banking cabal they're supposed to be watchdogging?
BRILLIANT!
Spam deleted.
GYSC,
My main point is not all that dependent upon what inflation does or does not do. If silver was to double in price from here but all other goods in the CPI basket (such as toilet paper) were to go up by a factor of 8, then silver would have been a very poor inflation hedge over the long-term.
Since silver is already nearly 4x its median inflation adjusted price (over the last 100 years), there is a serious risk here.
G.H.,
"Just think, they can expect exactly the same returns on their stock market investments as they are getting from their paychecks."
I hear that! My unemployed girlfriend resembles those remarks.
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