Silver's Bubble Has Burst?
By Staff News & Analysis - May 06, 2011

Silver loses shine in 20pc tumble The price of silver futures tumbled again on Wednesday, taking total losses to more than 20pc in a week amid fears that the precious metal represented a bubble bursting. In recent weeks, experts have warned that a dangerous bubble was forming in the silver markets. The price has soared nearly 175pc between August and the end of last week. – UK Telegraph

Dominant Social Theme: Too far, too fast. Maybe the run is over?

Free-Market Analysis: The doomsters are at it again. Every couple of months either silver or gold are in a "bubble." This is a fundamental misreading of the current bull market in money metals that probably still has three or four years to run – at least. If it gets that far. We're on record as pointing out that the dollar reserve system likely ended in 2008 when central banks around the world had to pour some US$10-US$20 TRILLION or more into world markets to salvage the banking system for the time being.

Fiat money and real money tend to run in cycles, depending on how long the Anglo-American power elite can keep the fiat system inflated. In the 1930s, 1970s and now in the 2000s, the fiat system became unbalanced and today the world's larger financial system continues to be distorted by government support. The system in fact cannot purge itself because to do so would probably put half the banking system out of business. Thus the system must reinflate despite imbalances, which is a difficult proposition.

It may be possible, as it was in the early 1980s, when Federal Reserve Chairman Paul Volcker drove America and the Western world into a ruinous recession in order to drain money from the unbalanced system. But this left the inflated banking system unscathed and guaranteed that the imbalances would return sooner or later as they have today.

These imbalances are what gold and silver are reacting to and will continue to react to for the foreseeable future. Of course the financial press, like mainstream academic an economic institutions, will not explain it properly. Gold and silver are what the Anglo-American power elites fear most and any chance to confuse people about what constitutes a real economy is to be seized. Thus it is that gold and silver are regularly declared in a bubble.

This is happening now in the silver market. Silver may have outpaced itself due to a number of technical factors but the silver-gold ratio is historically 15-16 to one and that means that even at US$1,000 an ounce gold, silver's historical ratio allowed for it to travel considerably higher than US$50.

And gold of course is around US$1,500, not US$1,000. The ratio shows us that silver has room at these prices to travel to US$75 or even US$100. Of course silver won't reach its historical ratio with gold until close to the end of the hard money cycle. When the cycle begins, gold is very cheap. Later as gold gets expensive, people begin to bid up silver and paper gold including junior mining companies.

Last to go in the cycle are likely various forms of paper silver. When paper gold and silver are being bid up and the gold and silver ratio is at its historic highs, the cycle will look to be over. But it seems we are a good deal away from that point yet. And, again, we believe the money system itself may end up reconfigured before the cycle reaches its inevitable conclusion.

In the meantime, the to-ing an fro-ing about gold and silver prices will continue to be subject to mainstream media speculation – as the mainstream media never met a business cycle it could not confuse. Most recently, we learn in the Telegraph and elsewhere that silver recently suffered its biggest three-day fall in 28 years, plunging from a peak of almost $50 an ounce to a current low of below $40.

We learn this was the inevitable result of "a dangerous bubble forming in the silver markets." The price, we learn from the Telegraph, has soared nearly 175 percent between August and the end of last week. What's the reason? "Traders said a raft of hedge funds and other big speculators in the silver markets decided to take their profits and sold large positions last week." Here's some more from the article:

The spike in the trading volumes is thought to have caused a panic in the markets which was then exacerbated by the four-day royal wedding holiday in London. The prolonged closure of the world's biggest precious metal market caused liquidity problems at a bad moment. Also over the weekend, Comex, the American exchange for silver futures, ramped up margin requirements.

It was probably the raising of margin requirements that caused most of the retrenchment. When the stock market is going up, the NYSE doesn't raise margin requirements; this mostly happens when gold and silver start to move. It is a good way to reduce momentum, and since the power elites are doing everything in their power – as they always do – to slow the inevitable rises in gold and silver, margin requirements are a preferred tool.

Just last week, of course, the media was trumpeting silver's new highs – "buoyed by a weak dollar and strong physical demand in Asia that also propelled gold to a record high for a seventh consecutive session" according to the Telegraph. "Everyone is buying," a Hong Kong-based dealer was quoted as saying. "There is stop-loss buying, as well as a good buying interest from China." Other reasons given for the escalating price of silver included low interest rates an the "escalating violence in Syria and Yemen."

It is all nonsense, of course. From a macro-point of view silver and gold will continue to climb in purchasing power until the back of the business cycle is broken and fiat money is drained from the system in large amounts. The West, and the rest of the world are probably nowhere near that inflexion point – especially with central banks still keeping rates artificially low and the US Fed itself just coming off more bouts of money printing via quantitative easing.

Every glitch in the gold and silver market will be reported on a day-to-day basis going forward because both markets are doubtless hitting their strides. There will likely be dozens more worldwide alarms of gold and silver being in bubbles – and generally all sorts of speculation will fill the newspapers and media giving people the impression that what is going on now is a kind of aberration.

It is not an aberration, or not if you believe in Austrian, free-market, business-cycle theory on which the above analysis is based. Or course, if you choose to follow a Keynesian, statist formula, you will find the above unconvincing (but then you probably didn't buy any gold or silver in the first place; too bad!). Today's money-metals movements constitute the other side of the fiat money cycle and Austrian economic theory tells us they will run to their logical conclusion unless the elite itself manages to interrupt them by declaring and implementing a new currency of some sort. In the 1930s, by the way, the cycle was cut short by World War II. We believe World War III may have begun, but we are doubtful it will derail the current cycle.

After Thoughts

What could do it this time would be the declaration of a new currency, perhaps via the IMF's SDRs and eventual Keynesian "bancor." But even here we have seen much speculation that what occurs if the elite actually attempts it, will be metals-backed. Anyway, these are huge cycles and not easily disrupted. And in the longer term they have little if nothing to do with "bubbles."

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