Many people are crying foul after the recent collapse in silver prices. Prices are down a full 33% from their overnight highs just a few months ago. Now, I won’t sit here and pretend to be a silver expert, but this looks to me like a classic case of bubble market dynamics. I was very clear in April about this “excessive risk”:
“This is not a popular call, but investing isn’t a popularity contest. The bottom line is that silver prices are on an unsustainable course. If I had to pick one bubble in the world today it would be the silver market. As is always the case, the fundamentals are always superb in a bubble, however, the market action never quite correlates appropriately. As I’ve said before, silver prices could double from here. On the other hand, they could also crater. If I am going to invest in precious metals there are lower risk ways to obtain exposure.”
A solid underlying fundamental picture got overhyped, massive price appreciation occurred, an epic bull market turned into a bubble (largely fueled by misconception about “debt monetization”, hyperinflation, QE2, etc.), prices blew through the roof and now prices are cratering as a result. This is nothing that we haven’t seen before. Even given the recent massive price declines, silver has still had an extraordinary 10 year run from just $3 to $33 today! You don’t have to find some boogeyman under the bed to explain the recent declines. All you need to understand is a little market history, human behavior and market dynamics.
But some are saying it’s the result of foul play. Eric Sprott (who actually is a silver market expert) believes there is more to this story than just bubble dynamics. In this excellent piece he outlines his bullish case for the precious metal:
Source: Sprott Asset Management
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.