What the heck is going on???? Is the sky falling? Should we retreat?
Well, note that during every long, steady march up of a bull market, there are violent corrections down. And during every single one of these violent corrections, most of the media and many of the analysts will begin shrieking with fear or gloating with vengeance that the bull market is over. Read this editorial by Peter Schiff dated 2006 [2] when silver corrected by 35% in 6 weeks. As you see, people were obviously shrieking that silver was in a bubble and now it was plummeting, popping and tumbling from I think it was $12 down to $9. No doubt Schiff will have received loads of hate mail from people who had ‘lost’ money by selling their silver after buying ‘at the bubble high’ on his recommendation. But without losers, there can be no winners in markets. It is because there are so many losers during a bull market that some can win. Their shrieks shake out even more losers, so the winners can win even more. Their loss is your gain.
To some, the losing is worth it. I have a friend who bought silver at the 2008 ‘bubble high’ of $22. Yes, again, in 2008, the silver bubble burst! This friend sold at $9 where silver once again fell. He ‘lost’ money by being ‘suckered’ into a bubble. Of course [3], $9 was obviously a support level for the next ride up on the bull. He doesn’t regret his losses as he says he just couldn’t deal with the emotional swings of the bull market ride.
Anyway, once again, for the third time in three years, the silver ‘bubble’ has burst. The fall is not as great as the 60% fall of 2008, but there are far more precious metals website owners and analysts mocking and ridiculing the ‘losers’ who bought at the top of the bubble. Some are suggesting silver is one of the biggest, craziest bubbles in history.
CPM Group has just released their 2010 silver supply and demand data, so I’ve gone through it to look for signs of a bubble that has collapsed. I’m not a mathematician, so I welcome any corrections on my maths and invite any additional observations that can be added to my own.
So if we’re in a bubble, of course, we must see the classic signs of mania. Buyers must be stampeding to the doors to buy at the high. Silver inventories should be bursting at the seams as all the crazies load up at mania highs. So let’s look for signs of that . . . you’ll find me in italics.
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CPM: The value of investor silver holdings was estimated at $14.7 billion at the end of 2010, the highest level on a nominal basis since 1988, with the record at $42.2 billion – nominally – in 1980. The value of silver holdings is the product of the price of silver and the cumulative silver bullion inventories.
Stacy – So on a nominal basis, the last time investor silver holdings were valued at $14.7 billion – nominally – was already 7 years into a 20 year bear market? On an inflation adjusted basis to 1988 dollars, the nominal value of last year’s $14.7 billion of investor silver holdings out to be $72.7 billion.
And at the peak of the last silver bull market – a time to which many are now comparing the current silver market – when it entered true parabolic stage, the total nominal value of investor holdings were $42.2 billion. $42,200,000,000 1980 dollars = 272,467,430,863.75 dollars in 2010 [7]. So on an inflation adjusted basis the size of the holdings in 1980 were roughly about 19 times bigger at a time when the global population was 50% smaller (1980 global population – 4.4 billion). And in 1980, half of that 4.4 billion global population was behind the iron curtain and when China was a micro economy of peasants far removed from the global economy.
So, essentially, this current ‘biggest bubble in history’ is actually at least 19 times smaller than the ‘Hunt brothers bubble’ and with 2.3 billion more potential investors on earth? Either many millions of ounces more of silver have to be owned by investors or the prices have to go much, much higher to get anywhere near the 1980 levels to which so many are comparing today.
Let’s return to the nominal numbers that CPM presents:
2010 nominal value silver holdings = $14.7 billion. 1980 nominal value of silver holdings = $42.2 billion
SH: Now compare that to:
2010 nominal US national debt = $14 trillion. 1980 nominal US national debt = $900 billion [8]
Stacy: In other words, compared to 1980, nominal holdings of silver were 4 times smaller in 2010 but U.S. national debt was more than 14 times higher on a nominal basis compared to 1980? And silver is in the bubble?
CPM: On a global basis, however, the value of these [silver] assets represents 0.007% of total global financial [3] assets, up from 0.003% in 2004. It was 0.34% in 1980.
Stacy: You do the maths on that, I get that silver assets represented 48 more times the percentage of total global financial assets in 1980. Of course, we all know that debt and derivatives have exploded since the 1980′s and that will account for the collapse in silver as a percentage of total global financial assets and it is also one of the reasons that many believe silver will go higher.
Back to investor demand . . .
CPM: Silver bought via exchange-traded funds continued to increase, with 122.7 million ounces added in 2010, versus 155.3 million added in 2009. [SH: So ETFs added 20% less than the previous year during this alleged 'mania'?] Coin demand surged in 2010, [SH: hello SLA!] and silver used in coins is estimated to have reached 74.5 million ounces, the highest level since 1967 [SH: when world population was just 3.485 billion; currently 6.775 billion]. The relatively low cost of silver coins, compared to gold, should keep this an attractive option for retail investors, CPM Group said. U.S. silver eagle coin sales contributed the most total silver used in coins, at 34.7 million ounces [SH: just to be on population parity, we'd need to see 50 million ounces], a record high. This was 46.5% of total silver used in coins in 2010.
SH: Please note that CPM notes the low cost of silver coins. This is a crucial element to the silver liberation army concept. A one ounce silver coin should not bankrupt anyone in the U.S. where average monthly salaries are over $2000.
So annual net purchases by investors totaled 142 million ounces in 2010. We are told, however, that more ounces were more bought in 1968 (when the global population was precisely half of current world population – global 3.6 billion; and the US population was 50% smaller – US – 200 million), 1980 (world population 4.4 billion) and 1983 (world population 4.7 billion; US – 233 million). So, population adjusted, 2010 investor demand for silver was at about half where it was at previous record highs. Would the financial media marvel if the US added as many monthly nominal jobs as we did in 1968?
Back to looking for signs of bubbles . . .
CPM: Total newly refined silver supply rose 4.3% in 2010, to 986.8 million ounces, driven by secondary supply sources.
CPM: Secondary silver supplies now account for one-third of total supplies, up from 26% in 2001.
Stacy: Um, secondary supply is up from 26% at the beginning of the bull market to just 30% in 2010? So where is all the supply from granny’s silverware that we keep hearing about? Where is the stampede? Most of that secondary supply is coming from recycling from electronics, not because of higher prices but because of regulations on recycling. In a bubble we should see massive oversupply. Think of the millions of new homes that were coming onto the market during the housing bubble? It got up to something like 11 months supply at one point.
Finally, outside of investor demand for silver, is the industrial demand:
CPM: Fabrication demand for silver rose 5% in 2010, to 844.8 million ounces, the first gain since 2007, but the demand is still under levels seen in the early 2000s. If the global economy continues to grow, CPM Group forecasts fabrication demand up 5.5% from 2010, to 890.9 million ounces.
Solar panel usage of silver has skyrocketed, with an estimated 64 million ounces used in 2010 up from 28.5 million ounces in 2009, and demand is likely to grow as there is an increased emphasis on “green energy.” It represented the biggest increase in fabrication demand, and in 2011 is expected to rise 15.2%, to 73.7 million ounces, but remains vulnerable to government incentives. [SH: also note that CPM notes that while consumer electronics are recycled every 3 years, silver in solar panels are generally locked up for 30 - 40 years].
Silver use in electronics reached a record 220.4 million ounces in 2010, up 5% from 2009, and is forecast by CPM Group to rise by 5.6% in 2011 to 232.7 million ounces. The growth comes from an increase in goods manufactured as producers are already thrifty in their precious metals use. The demand rise is most marked in developing countries, but the growth is universal, CPM Group said.
Jewelry and silverware use rose 0.1% over 2009, to 276.8 million ounces, and accounted for 32.8% of silver demand, the largest source of fabrication demand. This category is expected to rise by 5.9% in 2011, to 293.0 million ounces.
Medical use for silver has picked up in 2010, for its use as a biocide. It rose 7.7% versus 2009, to 5.6 million ounces and is projected to increase.
Stacy: Industrial fabrication far outweighs investor demand. Surely if we were in a bubble mania, these numbers would be much closer as 6.7 billion were gripped by frenzy?
Anyway, of course, with all numbers one can make of them what you want. Personally, I’m not buying the sky is falling argument. And, as such, I’m hoping for some more losers out there.
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