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Silver Entering The Bubble Land?

|Includes:GLD, iShares Silver Trust ETF (SLV)
"Be fearful when others are greedy and greedy when others are fearful"-Warren Buffett.

378.3%, 72.7%. This is the increase in value of SLV, the ISHARES Silver ETF, from Nov 28, 2008, and Jan 25, 2011 to the present. What exactly has occurred that has warranted an increase of this magnitude in this asset? Irrational exuberance from people who haven't learned their lesson from the dot com and housing bubble, or truly a new paradigm?

First I'd like to look at the industrial demand that silver has behind it. The United States Geological Survey- - states that industrial demand is actually dropping. Products such as x-rays and photography are having less of a need for silver as they implement new forms of technology that render the use of the metal obsolete. 

On the supply side, production is increasing, and will surely continue to do so with the profits that can be made with prices at this level.

Another interesting fact from this survey is how much silver can be recycled from these industrial applications. A particularly striking fact is that 60-90 tons in the last year were recovered just from photographic wastewater.

When making a bullish case for silver, industrial usage does not seem to hold much merit to me. And certainly nothing that should cause the price to almost quadruple in 2.5 years.

Most of the increase comes from investor speculation. Often times it is claimed that silver and likewise gold are excellent hedges against the inflation that many feel is inevitable in our economic future. However its history tells a different story. If you bought gold in the early 80's, 25 years later you had an asset that was worth about 2/3 of what it was when you purchased it. Silver behaved similarly over the same time period. This was all during an inflationary environment, which was quite high at times. The two do not show a strong correlation at all.

You would have done better holding your money in a 1% savings account. The ride during these years could often times be quite bumpy as well, with these commodities proving to be quite volatile.

Silver bulls often times like to claim that there is some impending silver shortage that will occur. According to the same USGS source previously mentioned, reserves increased 27.5% last year, and even with the continuing elevation of production, it is now at a level that is coming close to doubling the amount of years with current production levels that they have in reserves in comparison to what was the case in previous years of recent decades. No indication is given that any run out is coming our way anytime soon.

Often times you can hear doomsday prophecies that state otherwise in regards to what I have mentioned. Many times these blogs inevitably have "silver" somewhere in the title, or services through which they are pushing silver.

The commercials for precious metals are all over TV, the radio, and buzzing across the internet. They seem to be ubiquitous. It feels a lot like when Flip This House aired right at the height of the housing bubble.

Commodities don't have a balance sheet or cash flow. They do have market prices and economic value, but it is much harder to quantify and develop a point of view about the future price movements of them in comparison to stocks.

Short term speculation can have its place with a small portion of your portfolio, but with talk of people often contributing a significant portion of their portfolio towards items like silver, with long term aspirations and a mistaken belief that this is actually an area of safety, I feel many people are going to wind up buying high, and selling low with this, as is unfortunately the case in many other instances of this sort of behavior. Silver could probably continue its exponential rise for a bit, but when commodities come down, they come down fast and hard.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Stocks: SLV, GLD