Is Silver in a Bubble? …Silver Vs Tulips…
The bull-run in silver has been quite extraordinary of late. After trading in the $15-$20/ounce range during the second half of 2009 and the first half of 2010, it has exploded higher to almost $50/ounce.
After a decade of popping bubbles, a great number of commentators have succumbed to the temptation of calling silver a ‘bubble’. Although I empathize with this skepticism of the recent drastic price rise, I beg to differ on the terminology. I contend that such widespread ‘bubble-watching’ is a symptom of an embarrassed investment community. Collectively (and definitionally), they missed out on TMT in 2000, Real Estate in 2006 and just about everything in 2008. Here, in defiance of the contention that ‘Silver is a Bubble’, I contrast the characteristics of the famous Tulipomania with the recent bull market in Silver.
Widespread Participation & Adoration:
A true bubble exhibits the characteristics of widespread participation and adoration. As Charles Mackay wrote in Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, tulips spread from the exclusive fancy of the wealthy to – well – the fancy of almost everyone:
Rich people at Amsterdam sent for the bulbs direct to Constantinpole, and paid the most extravagent prices for them. The first roots planted in England were brought from Vienna in 1600. Until the year 1634 the tulip annually increased in reputation, until it was deemed a proof of bad taste in any man of fortune to be without a collection of them…
… The rage for possessing them soon caught the middle classes of society, and merchants and shopkeepers, even of moderate means, began to vie with each other in the rarity of these flowers and the preposterous prices the paid for them.
Does public sentiment towards silver really exhibit these characteristics? I think not – participation can hardly be called significant, let alone ‘widespread’. When looking back at the widespread participation in stocks pre-1929, TMT pre-2000, Real Estate pre-2006 and stocks pre-2008, it should be clear that silver doesn’t display this crucial ‘bubble-characteristic’. Likewise, is silver really ‘loved’? Are people vying with each other to get it? Again, I think not – rather, it remains an ‘alternative’ asset.
Stupidly High Prices (and I do mean stupid!):
During the Tulip Bubble, the prices of tulips rose to just amazingly high levels. Quoting Charles Mackay again:
So anxious were the speculators to obtain them that one person offered the fee-simple of twelve acres of building ground for the Harlaem tulip. That of Amsterdam was bought for 4600 florins, a new carriage, two grey horses, and a complete suit of harness.
With our hands on our hearts, can we really say that the price of silver is absolutely ridiculous at around $50? After all, one still has to pay around 260 ounces of silver to acquire the Dow Jones Industrial Average, around 30 ounces to buy an ounce of gold, and 5500 ounces for the average house in the US. Moreover, it is ‘only’ just testing its all time high of $50 recorded in 1980. Considering that the dollar itself has fallen by 60% against consumer goods (according to Government statistics), is this price really ridiculous?
Who’s the Crazy Guy?
The essence of a bubble is that the popular infatuation with the asset in question is ferocious and difficult to oppose. Humphrey B. Neill eloquently described this difficulty in one of my favorite books - The Art of Contrary Thinking:
… others with whom you discuss your contrary opinions will almost always violently disagree – will find numberless reasons and arguments to show you you’re wrong in your adverse viewpoints. It will be difficult to stick to your contrary viewpoints because it will seem so obvious that you should be thinking as others are. Furthermore, it often takes a long time to prove out your point. This weakens your faith, because you begin to fear your contrary ideas are the wrong ones!
This was certainly true in the case of the Tulipomania:
People who had been absent from Holland, and whose chance it was to return when this folly was at its maximum, were sometimes led into awkward dilemmas by their ignorance.
With regards to today’s supposed ‘silver bubble’, I still believe that contempt is thrown upon the guy who’s long rather than the guy who’s short (or out). Only crazy Austrians/libertarians/Ron Paul supporters buy physical silver, right?
General Commerce gets Sucked-In:
Another characteristic of a ‘bubble’ is that general commerce gets sucked-in. Quoting from Memoirs of Extraordinary Popular Delusions and the Madness of Crowds:
In 1634, the rage among the Dutch to possess them was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade.
Although the industries pertaining to silver may have expanded and become more exuberant, one can hardly call such exuberance widespread (as it relates to silver). We don’t see silver pervading all walks of commerce by any stretch of the imagination. In contrast, the major bubbles of the past 300 years have exhibited this characteristic.
‘It’ll Last Forever’:
The penultimate attribute of bubbles that I’ll alude to here is the belief that ‘it’ll last forever‘. The epic Real Estate bubble culminated with the phrase ‘house prices always go up’. Indeed, some academic justifications had even gone far enough to say that ‘real estate cannot fall’. This kind-of thinking was also evident during the Tulip bubble:
Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them.
Greed Vs Fear:
Last of all, I should mention that most bubbles exhibit the emotion of greed rather than fear. That is, the asset becomes the ‘ticket to easy riches’. Of course, Charles Mackay mentioned this emotion when describing the Tulip bubble (in Memoirs of Extraordinary Popular Delusions and the Madness of Crowds):
The tulip-jobbers speculated in the rise and fall of the tulip stocks, and made large profits by buying when prices fell, and selling when they rose. Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and , one after the other, they rushed to the tulip marts, like flies around a honeypot…
…People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart.
If anything, this Silver bull-market seems to have the primary motive of fear – indeed, fear of inflation, fear of an increasingly worthless currency, fear of the helicopter… Now, execution decisions based on such fear may turn out to be misguided, but not because ‘silver is a bubble’.
To be sure, I am skeptical of this near-parabolic price rise. However, I strongly believe that executing trades based on the belief that this is a bubble is a dangerous endeavor.
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