bubblesSubmitted by GE Christenson, DevientInvestor.com

Bubbles start slowly and then accelerate to unsustainable highs (on large volume) that are largely created by greed and fear but not fundamental evaluations. Bubbles generally follow the “Pareto Principle” where approximately 80% of the price move occurs in the LAST 20% of the time.
Assuming the 80/20 “rule” and the phase 2 price change ratio of approximately 5, what could happen if gold and silver rise into another speculative bubble?

Silver began its uptrend in November 2001 at $4.01 and gold began its move in April 2001 at $255. Silver rallied to nearly $50 in 2011, and gold also rallied to a new high of about $1,900 in 2011. Assume that both surpass those highs about mid-2013 and accelerate into phase 2 thereafter. Using these assumptions, phase 1 for silver would measure 12.5 years and phase 2 could last until approximately late 2016 – early 2017. If we assume that phase 1 was a move from $4 to $50 and that represents 19% of the total move, the high could be around $250. The ratio of phase 2 ending price to beginning price would be 5:1 – reasonable.

Indications for gold suggest a similar end date and a phase 2 bubble price of perhaps $9,000 per ounce. The ratio of phase 2 ending price to beginning price would be 4.7:1 at $9,000.

 

 

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This is not a prediction of future prices of gold and silver; it is an indication of what could happen in a speculative bubble environment based on the history of previous bubbles.

I’ll summarize a simple analysis of past bubbles.

Definitions

    • Bubble: A speculative mania in a market that is priced well beyond what the fundamentals and intrinsic value indicate.
    • Phase 1: The first phase of the bubble begins with the price bottoming and initiating a long rally. It is often indicated by a triggering event such as Nixon closing the “gold window” on August 15, 1971 – the beginning of the gold and silver bubbles that terminated in 1980. The market rallies for some years, hits a new “all-time” high, and then corrects.

When the market proceeds into a bubble phase, it rallies beyond that new high and continues much higher. The end of phase 1 and the beginning of phase 2 are the point at which the market rallies from its correction low and exceeds its previous high. See the graph of the silver market with the indicated beginning and end points for phase 1 and phase 2.

  • Phase 2: The final phase of the bubble starts when the price exceeds the “new high” and then rallies to a much higher and unsustainable level.

Click on image to enlarge.

I looked at the time and price data for the South Sea Bubble in England from 1719 -1720, the silver bubble from August 1971 to January 1980, the NASDAQ bubble from August 1982 to March 2000, the Japanese Real Estate bubble from 1965 to 1991, the gold bubble from August 1971 to January 1980, and the S&P mini-bubble from August 1982 to March of 2000. A spreadsheet will not display well, so I’ll list my results. Please realize that all prices and dates are approximate – this is “big picture” analysis.

The conclusion is that bubbles start slowly and then accelerate to unsustainable highs (on large volume) that are largely created by greed and fear but not fundamental evaluations. Bubbles generally follow the “Pareto Principle” where approximately 80% of the price move occurs in the LAST 20% of the time. Consider:

South Sea Bubble: (Extreme price bubble)

  • Phase 1: January 1719 to March 1720. Price from $120 to $180.
  • Phase 2: March 1720 to July 1720. Price from $180 to $900.
  • Time: Phase 1 – 75%, phase 2 – 25%.
  • Price: Phase 1 – 8%, phase 2 – 92%. Phase 2 price ratio: 5

Silver Bubble: (Extreme price bubble)

    • Phase 1: August 1971 to March 1978. Price from $1.50 to $6.40.
    • Phase 2: March 1978 to January 1980. Price from $6.40 to $50.
    • Time: Phase 1 – 78%, phase 2 – 22%.
    • Price: Phase 1 – 10%, phase 2 – 90%. Phase 2 price ratio: 7.8

 

NASDAQ Bubble: (Extreme price bubble)

    • Phase 1: August 1982 to February 1995. Price from $168 to $780.
    • Phase 2: February 1995 to March 2000. Price from $780 to $4,880.
    • Time: Phase 1 – 71%, phase 2 – 29%.
    • Price: Phase 1 – 13%, phase 2 – 87%. Phase 2 price ratio: 6.3

 

Japanese Real Estate Bubble: (approximate numbers)

    • Phase 1: 1960 to 1979. Price Index from 4 to 50.
    • Phase 2: 1979 to 1991. Price Index from 50 to 225.
    • Time: Phase 1 – 61%, phase 2 – 39%.
    • Price: Phase 1 – 21%, phase 2 – 79%. Phase 2 price ratio: 4.5

 

Gold Bubble:

    • Phase 1: August 1971 to July 1978. Price from $40 to $200.
    • Phase 2: July 1978 to January 1980. Price from $200 to $870.
    • Time: Phase 1 – 82%, phase 2 – 18%.
    • Price: Phase 1 – 19%, phase 2 – 81%. Phase 2 price ratio: 4.4

 

S&P Bubble: (Mini-bubble)

    • Phase 1: August 1982 to February 1995. Price from $100 to $483.
    • Phase 2: February 1995 to March 2000. Price from $483 to $1,574.
    • Time: Phase 1 – 71%, phase 2 – 29%.
    • Price: Phase 1 – 26%, phase 2 – 74%. Phase 2 price ratio: 3.3

 

Summary

Bubbles tend to follow the 80/20 ratio indicated in the Pareto Principle. Phase 1 takes approximately 70-80% of the time and covers approximately 10-20% of the total price change. Phase 2 accelerates so that it takes only 20-30% of the time but covers 80-90% of the price change. Extreme bubbles such as the South Sea Bubble and the Silver bubble experience approximately 90% of the price change in the 2nd phase. The ratio of the phase 2 ending price to beginning price is typically 4 to 8 – a huge price move. Such bubbles are rare; the subsequent crash is usually devastating.

Future Bubbles

In the opinion of many analysts, sovereign debt is an ongoing bubble that could burst with world-wide consequences. Should deficit spending and bond monetization (Quantitative Easing) accelerate in the next several years, as seems likely, that sovereign debt bubble will inflate further. Because of the massive printing of dollars, the value of the dollar must fall, particularly against commodities such as oil, gold, and silver. As the purchasing power of the dollar falls, an increasing number of people will realize their dollars are losing value, and those people will seek safety for their savings and retirement. Gold and silver will benefit from an increasingly desperate search for safety as a result of the decline of the dollar. Assuming the 80/20 “rule” and the phase 2 price change ratio of approximately 5, what could happen if gold and silver rise into another speculative bubble?

Assume that silver began its uptrend in November 2001 at $4.01 and that gold began its move in April 2001 at $255. Silver rallied to nearly $50 in 2011, and gold also rallied to a new high of about $1,900 in 2011. Assume that both surpass those highs about mid-2013 and accelerate into phase 2 thereafter. Using these assumptions, phase 1 for silver would measure 12.5 years and phase 2 could last until approximately late 2016 – early 2017. If we assume that phase 1 was a move from $4 to $50 and that represents 19% of the total move, the high could be around $250. The ratio of phase 2 ending price to beginning price would be 5:1 – reasonable.

Indications for gold suggest a similar end date and a phase 2 bubble price of perhaps $9,000 per ounce. The ratio of phase 2 ending price to beginning price would be 4.7:1 at $9,000.

The gold to silver ratio at these bubble prices would be approximately 36, much higher than the ratio from 1980. Perhaps silver would “blow-off” higher, like it did in 1980, and force the gold to silver ratio lower or perhaps gold might not rally so high. Time will tell.

Outrageous?

Well, yes, at first glance, those prices do seem outrageous. But consider for perspective:

  • Apple stock rose from about $4 in 1997 to over $700 in 2012.
  • Silver rose from $1.50 to $50.00 in less than 10 years.
  • Gold rose from about $40 to over $850 in less than 10 years.
  • Crude oil rose from less than $11 in 1998 to almost $150 in 2008.
  • The official US national debt is larger than $16,000,000,000,000. The unfunded liabilities, depending on who is counting, are approximately $100,000,000,000,000 to $230,000,000,000,000. Divide $200 Trillion by approximately 300,000,000 people and the unfunded debt per capita of the United States is approximately $700,000. That is outrageous!
  • The official national debt increases in excess of $3,000,000,000 per day, each and every day. The unfunded liabilities increase by perhaps five – ten times that amount. Outrageous!
  • We still pretend the national debt is not a problem and that it will be “rolled over” forever. That is outrageous.
  • Argentina has revalued their currency several times in the last 30 years – they have dropped 8 zeros off their currency since 1980. Savings accounts and the middle class were devastated several times. It can happen again.

Given the above for perspective, is gold at $5,000 to $10,000 per ounce unreasonable or impossible? Is silver at $200 to $400 per ounce unreasonable or impossible? Past bubbles have had an ending price 4 – 8 times higher than the phase 2 beginning price, so history has shown that such prices for gold and silver are indeed possible. Possible is not the same as certain – but these bubble price indications are certainly worth your consideration.

GE Christenson
Deviant Investor

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  1. Silver is the biggest antibubble in history. How can world’s oldest monies catch some bubble value, as long as everybody is not trading their everyday business based to these real monies? 
    Maybe I can understand this stuff after metal’s remonetisation..

    • Just sharing my thoughts, My father in-law recently died at 85. Going through his belongings we came across some silver and gold coins. The receipts are dated from 1978 to 1983. It appears he got caught up in the 2nd phase,according to the time line of the last PM bull market which means he lost  money. We also found some investing news letters from that time one in particular dated 7/23/83 titled “THE CASE FOR $100 SILVER BY 1986″ and it stated some of the exact same factors that are presented to us today. Tensions in the Middle East, South Africa and Latin America. The communist world at that time was a net importer. It pointed out America’s rising and unsustainable national debt which was 350 billion. Also supply constraints and manipulation. Looking at AG charts I can’t help but see similarities that show 2011 as possibly being the 2nd phase of this bull run. 2008 it went to 20 then back to 9 and 2011 up to 49 and change now declined to low 30′s. In 78 AG went to 14 and 80 shot to almost 50. The powers that be manipulated for 30 years last time. My fantasy believes it will rise but reality and history tell a different tale. IT WILL BE DIFFERENT THIS TIME keeps ringing in my ears. Good luck to all 
       
       

    • We didn’t have the derivatives bubble then and that is what will drive higher prices for commodities of all kinds. Plus we may see a second housing bubble.

  2. Guys, silver is in a major bubble. I’ll do anyone here a favor and buy as much as you want to sell me at 25 bucks an ounce cash money. Once my money is gone, deal is over. So get in line before the price crashed. Those who refuse, will be subject to the wrath of the wicked witch…
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     
    lmao.
     

  3. With every fiat on the planet ready to implode and collapse like a red giant it’s hard to see real money like Ag, owned by only 1%-2% of the global population going into a bubble for years to come. When it is in a bubble it won’t be to the moon but past the temination shock, Ort Cloud, and end around Alfa Centauri. Now that’s a bubble!

    • Interesting point, RRG.  Makes me wonder what the US ownership of silver was when it was in the 1980ish bubble.  Having lived through that time, I don’t recall a lot of people buying silver until the very end of the mania phase just weeks before silver crashed hard.  Once that happened, they almost could not give it away.

  4. Let’s face facts. Those of us who are astute enough to realize that silver is money, has value, and can withstand the onslaught of greedy banksters and politicians will accumulate for the arduous times that lay ahead.  Those mental misfits that are content to take Obammy phones, housing, EBT cards, and any other hand-out will just ride it out until there are no more freebees–and that time WILL come–.  Then, they will come after our silver.  Unfortunately for them, all they will get is a face full of 00 buckshot or a projectile from a .223/5.56 rifle.  And then, peace will reign again….

    • Yep… or a 7.62  x 39 projectile AND some buckshot.  #4 buck is my fav.  27 pellets of whup-ass in one easy to handle package.  ;-)
       

  5. Articles like this no longer excite me.  I am in it for the long haul though.  Once this horrible consolodation period ends I will regain my excitement.  There is a chance that this consolodation could last longer than most pundits expect.  Lots of investors are at risk of giving up.  My strategy is to keep emotion out of this right now because we could have another 12 months of narrow trading ranges in front of us.  I keep this reality in mind at all times.

    • It certainly has lasted longer than most would have thought possible. The value in articles like this ( much more than the SILVER AT 1000 dollars imminent) is that it shows what appear to be cracks in the dam. We know the dam just doesn’t break, but to see some cracks developing, is nice.
       

    • Agreed, Charlie… BUT… there WILL come a time when we will be wise to sell the stack.  Will ANY of us recognize that time?  Probably not me, for sure.  I am a LOT better at knowing when to buy than when to sell.  If silver prices do bubble at some point, selling into that bubble WILL be immensely profitable.  The sweet news is that once the bubble has popped, we can buy the silver back again AND also have many goodies that we bought with all that extra moolah!  :-D
       

  6. Gold and Silver will never enter any kind of bubble stage because at some point they will be treated as money again, and money is not an investment (although money in the form of precious metals are presently undervalued).  Money is used as a measure of value for everything else.  Technically, real money cannot become a bubble.  When there’s no more fiat paper money, everything will be valued in oz or grams of Silver or Gold.  Where’s the bubble going to come from in Gold and Silver when they are the unit of account?
     
    Therefore, the exit strategy for holding Gold and Silver until the time of change is not going to be to outright sell Gold and Silver before everyone else does (ie, before a ‘bubble crash’), but to spend Gold and Silver as money.

    • An interesting point of view.  Not sure that I grasp your meaning though.  The last silver bubble and crash of about 1980 showed that selling into the bubble in the $40-50 / oz. range would have been VERY profitable for anyone who did it.  Of course, silver did not become money thereafter.  Are you saying that if it does become money, it will not decline in price ever after; essentially that price will then be irrelevant?
       

  7. It’s a hard call comparing 1980 to now, but “they” do have a playbook, things can have somewhat of a “same siht, different day” aspect. I also believe “they” have metals as currency waiting in the wings as one of their possible plays, after they’ve killed off 90% of us.
     

  8. So silver was demonetized in 1873 and Gold was demonetized in 1933.  The time of 140 years for Silver and 80 years for Gold.  In 1873 Silver was a $1.40/ounce and a nominal high of $50.35/ounce in January 1980.  Gold was $20.67/ounce in 1933 and the high of $1896.50 in Sept 2011.  So has gold been in phase two since breaking the the $850 (January 1980) nominal high?  How can anyone make sense of this using currency to account for money?  We are trying to divide limited money (Gold & Silver) with a limitless currency(USD).  Only when we return to measuring our wealth by weight will sanity return to accounting.  In other words… they can keep their dollars and I’ll keep my GOLD and SILVER!  

  9. Knowing that the rule of law is no longer in effect in this country, why does anyone believe the ‘logical conclusion’ on PM’s inevitable rise to stardom? What makes all the experts on metals so sure they’ve got it right and, are not being played? I’ve got my stack, just added on the dip but, how likely is it that we’ve been snowballed?

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