Who can avoid being transfixed by recent moves in silver? If trading silver is not your primary activity the bubble, its bursting and current rebound are a sight to behold, almost like some great natural disaster unfolding real time. As I’ve written before, the supply of and demand for silver are both unusually unresponsive to its price. Most mined silver is a by-product of other metals such as gold, copper or zinc. Most industrially consumed silver is a minor input into consumer technology products such as cell phones. Neither producers nor consumers change their behavior much when prices move, which is why prices move so much when speculators dominate activity.
Although we happily don’t make a living from forecasting silver prices, we are paying more attention than usual because its movements are creating opportunities in silver-related securities (such as mining stocks). The commodity collapse last week looks very like a contagion-type delevering. Crude oil’s drop of around $20 a barrel over a week was most likely a flushing out of speculators rather than reflective of a sharp drop in global economic activity. Indeed, recent GDP forecast revisions were modestly lower, in part because of rising energy prices, so lower oil will reduce this headwind to consumption. Just as years ago distress in one emerging market would affect others through contagion since many hedge funds specialized in emerging markets, so today many hedge funds specialize in commodities so contagion links markets that would not otherwise be linked.Last week’s WSJ article (“Silver-Mad Small Investors Fueled an Epic Rise and Fall”) illustrates the way no doubt many individual investors (in this case, gamblers) were drawn in. The article includes comments from David Zornetsky, unemployed and living in Beacon, NY hoping to use gains on silver trading to finance a move to New York City (well, wouldn’t you?). By way of explanation for his bets, Mr. Zornetsky offered that "I had been hearing that silver could go up to $150 an ounce this year," Following last week’s challenge to that orthodoxy which reduced the value of his silver “investment” by 25% in a matter of days, he said, "I don't understand,” adding, “Silver is supposed to do very well this year." Oh, I see. Meanwhile, Florida retiree Donna Badach says she has 60% of her net worth in silver. She apparently started buying in 2003, "because "it's so shaky to see what's going on all over the world." Well, at least she started early, and even after last week’s rout must still be up on her investment. Ms. Badach used to work in the mortgage-banking industry in Hillsboro, FL and so presumably has more than a passing familiarity with bubbles. Hopefully she’ll recognize the one in silver before it’s too late and her retirement savings evaporate, although the signs are not promising. She said, "I don't believe the correction will last long. Silver will hit $100 before the end of this year. I have never felt so sure in my life about something." I wish them both well. I have no desire to see them and others poorer. However, the media focus, extreme price movements and stories like these suggest that for silver, and maybe only silver, the bubble is over.
Disclosure: I am long CDE.