November 5, 2013

Silver bubble - or not? Part 2

In the earlier article, Silver bubble - or not? from early 2012, we came to the conclusion that the silver chart looked like a classic bubble chart. The silver price had in 2011 moved from a low of 26 to a high of 50, and back again to a low of 26. One reason the price began to fall in 2011 was that the margin was increased by the commodities exchange. Almost two years later, I thought it would be interesting to check silver again and also draw conclusions from the silver bubble in the 1980s.

To get a better understanding, I've decided to use data from COMEX Silver Futures from Quandl, which is a company that has collected data from countries, commodities, etc. If you need data of some kind, go to Quandl and use their search function and you will probably find the data you need. The silver price data include data from 1963 to yesterday. To make the different charts, I've used python with matplotlib. If you want the file, leave a comment and I will upload it! I will also use the term bubble even though it's impossible to know if silver is currently a bubble.

We begin with the long-term chart. The 1980s bubble peaked in 1980-01-17 with a silver price of 48.7, and the latest bubble peaked in 2011-04-29 with a silver price of 48.58. Click on the charts to see a better resolution.

Silver price 1963-06-13 to 2013-11-04

Now we will compare the buildups before the bubbles. These charts begin at an index of 100. To really see what happened before the bubbles, I've included charts what happened 500 days, 2000 days, and 4000 days before the peak. I've also included 20 days after the peak.

500 days before the peak of the silver bubbles

2000 days before the peak of the silver bubbles

4000 days before the peak of the silver bubbles

And now what happened after the peak of the bubbles. The chart begin at an index of 100.

Silver price after the peak of the bubbles

Silver price after the peak of the bubbles

It might be difficult to compare silver today and silver in the 1980s. According to Wikipedia, What happened in the 1980s was that the Hunt brothers, Nelson and William, had for some time attempted to corner the market in silver. In 1979, the silver price jumped from $6 to a record high of $48.70 - an increase of 712 percent. The brothers were estimated to hold one third of the entire world supply of silver (other than that held by governments).

In response to the brothers's hoarding of silver, the commodities exchange COMEX adopted Silver Rule 7. The rule placed heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed to finance their purchases, and as the price began to fall ( it dropped over 50 percent in four days), the brothers were unable to meet their obligations. The Hunts lost over a billion dollars. They have since the 1980s recovered and it is estimated that William Herbert Hunt is worth $3 billion.

Update! I've found a really looong-term chart of silver, ranging from year 1344 to 1998. I have no idea how they found the value of silver in 1344, but it might provide some value.

Silver price 1344-1998 (adjusted for inflation). Source: fxmadness

Here's a similar chart for gold.

Gold price 1344-1998 (adjusted for inflation). Source: fxmadness