Saturday, October 8, 2011

Q&A With The Doc: Will it be Another 3 Decades Before Silver Returns to $50?

Steve writes:

Hello Doc,
Long time reader of your sight; and long time silver collector/investor.
I recall a personal story from the 80's about my Dad's friend that bought into loads of silver dollars at the higher pricing of the 80's, only to sit on it and watch his investment drain for years (until now of course).
I'm 39 years old and fairly heavily invested in physical silver, and I am very concerned that I am doing the same thing as my Dad's friend. Do you believe it will be a three decade wait before we see silver back in the 40's/50's like my Dad's friend? Are things different now? Should I sit tight and wait it out?
I guess I need some encouragement because I feel sort of dense (for lack of a better word) because I feel that I bought in even though I knew of a personal story of buying high and the bottom falling out (my Dad's friend who is now in his upper 80's).
Thanks for your great site.

We understand your feelings of doubt after silver's recent 40% paper smash.  Essentially you are asking whether we have just witnessed the end of the 10 year gold and silver bull market, and the beginning of another 30 year bear cycle.
Yes, silver corrected violently from near the $50 level, similarly to what happened in the early 1980's. 
However the similarities end there- yes, this time is different, MUCH DIFFERENT.
At the peak of the gold and silver bull market in the early 1980's, precious metals and mining company assets comprised nearly 30% of total global assets.  A similar percentage was seen in previous peaks such as 1921 and 1948.

Gold and Gold Mining Shares in % of Global Assets

Gold and Gold Mining Shares in % of Global Assets
(Sources:, Erste Group Research)

Further, the average % of global assets in gold and gold shares from 1921-1981 was 26%.  Today, 10 years into the gold and silver bull markets, this percentage remains under 1%!

Massive secular bull markets simply do not end quietly with under 1% of total financial assets participating.
Secular bull markets end in spectacular fashion, at the end of phase 3, when the general public has all rushed in, and no further buyers remain.

In 1980, the above ground silver inventory was approximately 10-12 Billion ounces, and 2 Texas Billionaires and a few wealthy Arabs drove silver above $50/oz.

In 2011, there remain only 500-700 Million above ground ounces of silver, and THE ENTIRE WORLD IS PARTICIPATING in the bull market, meaning this time China and India are included.

It is also critical to realize that while nominally gold has eclipsed and more than doubled its 1980's high of $850, and silver has nearly reached its 1980's high of $50.35, adjusted for inflation, neither are remotely close to even matching previous bull market highs.  You have not bought at the top as your father's friend did in the 1980' have simply bought at an early bull market top prior to a correction.  In a long term bull market, the trend is your friend, and time will erase the mistakes of buying at intermediate tops in a bull run.
Gold's 1980's high of $850 if adjusted for real inflation is now over $8,000/ troy oz.  Gold would need more than a 5-bagger from here to simply match its 1980's high, adjusted for inflation.
Silver has even further to run to match previous bull-market tops.  The $50.35 high, adjusted for real inflation, is nearly $500/troy oz in 2011 dollars.
In the 1980's Fed Chairman Paul Volcker hiked interest rates to 21.5% in 1981- ABOVE real inflation, in order to tame inflation, and enable capital to flow out of inflation hedges such as gold and silver and into bonds.  Volcker was successful.  Fast forward to today.  The Bernank has promised 0% interest rates through 2013, meaning that true interest rates (interest rate minus real inflation) will continue to run approximately -7% for the foreseeable future.  QE continues behind the scenes, and the US gov't continues running a $1.5 TRILLION annual budget deficit.
Can you imagine what would happen to the US economy today if Bernanke attempted to raise interest rates from 0% to above 20%?  The US would instantly crash into the greatest deflationary depression of all-time.  Real estate would crash another 90% from current levels, and unemployment would reach 50%.

Finally, perhaps the biggest difference between today and the early 1980's are over-the-counter derivatives.
The OTC derivative market is now well above $1.25 QUADRILLION, and STILL GROWING!  These derivatives threaten to take down the entire current financial system thanks to leverage and the real estate collapse, and physical gold and silver are among THE ONLY ASSETS that will protect one from a massive financial paper collapse due to a supernova derivative explosion.

In summary Steve, as long as you hold physical bullion, nothing has changed, and you have nothing to fear long term.  Gold and silver will power higher once this correction has completed.  If you bought in near the recent highs of $50, this correction should be EMBRACED by substantially ADDING to your physical positions!  Nothing changed fundamentally to induce a 40% sell-off in silver- it was entirely a paper futures raid, in order for the commercial banks to cover a substantial number of silver shorts.
Those who purchased silver near the current bull market high of $21.32 in March of 2008 likely felt similar as silver plunged to $8 over the next 9 months- yet even if you bought at the very highest tick of $21.32 the day of Bear Sterns' collapse, 3 years later (even after a 40% correction), your position is still up an impressive 50%.  We expect those who bought silver into the current correction lows near $26 to experience the same over the next 2-3 years.

Have faith Steve, NOTHING HAS CHANGED.  $30 silver is an UNBELIEVABLE OPPORTUNITY- we are buying hand over fist at these prices.