"I can calculate the movement of the stars, but not the madness of men" Sir Isaac Newton
The formation and eventual collapse of bubbles is probably the most intriguing and misunderstood aspect of financial markets. Two major speculative bubbles have emerged recently and subsequently popped: The dot-com/Nasdaq mania of the late "?90s-early 2000s and the US real estate bubble of 2004-2006 which morphed into a full blown worldwide financial crisis during 2008-2009. Those two speculative frenzies were as different as they were similar. Let's analyze some of the similarities and then contrast some of the differences:
Similarities between the dot-com bubble and US real estate bubble
While the same key ingredients of a speculative bubble existed in both the dot-com and US real estate bubbles, they were very different in their size and ramifications. The real estate bubble was many orders of magnitude larger than the dot-com mania. Moreover, due to the sheer size of the US housing market and its interconnectedness with not only the US banking system but the global banking system, the consequences were far reaching (we are still dealing with them).
The dot-com bubble was fueled by the seemingly limitless possibilities of the internet and burst only when valuations became so incredibly stretched (Cisco was the largest market capitalization company in the world) and there were no bears left in the room. Whereas, the US housing bubble was fueled by record low interest rates, mortgage securitization, complicit rating agencies, and the belief that nationwide home ownership rates should be over 80%.
Speculative Bubble Checklist
What is fueling the rapid price appreciation in silver and is silver in a speculative bubble?
Silver
In my view silver meets much of the speculative bubble criteria, however it is missing a couple of key ingredients. There is a very clear "?this time is different' story which has laid the foundation for the most recent surge in silver. The bullish argument for silver goes something like this:
There is more to the bullish silver story than what I have laid out, but delving into that is not the purpose of this post. The push to draw in new "?investors' to the silver market has recently taken on a much more aggressive change of character. There are ads all over the web urging people to buy silver bullion/coins, mass mailings promoting silver coins as an investment to areas of the country with large retiree communities (such as where I live), moreover the appeal of silver has become much more widespread over the past few months.
My favorite silver story started about a month ago at the gym. Every time I go to my gym there is a group of 3-4 chemically enhanced bodybuilders (I'm pretty sure they don't read my blog"¦.at least I hope they don't) who are particularly vocal in their conversations which range from sports cars to women and other things which I won't get into. Well, about a month ago I heard them discussing how silver was now the place to be invested. One of the bodybuilders even went as far as to say he was buying as much as "?he could get his hands on'. This week I plan to ask them for their expert opinions on the current state of the silver market, rest assured, I will report back.
From my vantage point, most of the recent surge in silver prices has been driven by real investment demand from both large institutions and small retail investors (and bodybuilders). Only in the last two weeks has it felt as though there was a large speculative/leverage based bid in the market. The volume in $SLV calls on Thursday was especially noteworthy, in addition the notional dollar volume of $SI_F futures contracts topped $29 billion on Thursday. Naked call options and futures trading is about as speculative as markets get which are accessible to novices. I believe that the recent trading volume in SLV calls and SI_F contracts are a yellow flag/warning light which indicate that silver is getting a bit overheated in the near term.
In summary, I don't believe that silver is in a bubble yet, but it certainly has the early signs of something that could eventually grow into a massive bubble. At what price? Ask Sir Isaac Newton"¦
This article is intended to be the beginning of an ongoing conversation on silver and bubbles in general. I will continue to update it and I am interested to hear reader’s thoughts and ideas on these topics.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
Robert Sinn is a professional trader and market analyst who focuses on multiple asset classes including equities, futures, options and currencies. He integrates fundamental and technical analysis. More »
This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice.This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.
Read Full Article »