Revisiting The Silver Parabola

February 20, 2014

Those who follow markets are always looking at past patterns for clues to future price behavior. Many in the silver space obsess over similarities to the great bull run in silver after silver became a commodity future in 1963. That bull market was erratic and is at the very least a reminder of how wild silver can be. This earlier bull market also serves as a warning to anyone looking at how overbought silver may be in the short-term. You might be looking for a pullback, but it may never come. This does not mean that you shouldn’t practice risk management and it certainly doesn’t mean that my outcome is guaranteed. However, playing the casino that is the market means understanding the whole story--- it means understanding the nature of the casino you are playing in, and trying to use as much knowledge to your advantage as possible.

Sometimes, Silver Leaves Bears in the Dust

After silver bottomed in 1971 following a brutal three year downturn from its 1968 high—a bottom that occurred right around what had been the former government support price for silver near $1.30, the silver price moved in one direction and one direction only---up. Not just up in a small way, but up from 1.30 in November 1971 to 5.43 an ounce by May of 1974. This meant that your money doubled not once but twice in the space of less than three years. And, more importantly, the price move was relentless. On a monthly basis, after silver bottomed in November 1971, it did not log a closing average monthly loss until September 1972 after the price had rallied nearly 50% off the bottom. Then, on the way to its 1974 intermediate high of 5.43 an ounce, silver only suffered three small monthly declines in May, July and August of 1973, and then a fourth in April 1974. This means that over the 30 months that it took for silver to double twice in value, the white metal only suffered 5 monthly declines--- and these declines averaged less than 5%.

Once silver hit 5.43 in 1974, it spent a little more than 4 years going sideways—which was a longer consolidation than the 1968 to 1971 case. But in percentage terms it was far more mild than the 50% decline silver took going into the 1971 low.

Of course most of us following the markets know what happened next, once silver reached its former 5.43 high in July of 1978. The combination of the Hunt Brothers, a stagnant economy and stock market, inflation moving higher while the Fed appeared asleep at the wheel, coupled with all sorts of Middle Eastern turmoil, ranging from Soviets in Afghanistan to the Iranian Revolution, helped light a spark in the silver market that would go down in the record books in terms of bull moves. Silver once again began moving inexorably higher month after month, only logging one monthly decline, in November 1978, of roughly 2%, before silver hit its all time high of over 50 dollars an ounce in January 1980. Silver experienced nearly a 1,000 percent return in 18 months. Of course, the price of silver then collapsed—which goes to my point about risk management when dealing with any commodity, even one, like silver, that has been (and may be again) treated as money.

The Silver Parabola’s Repeat Performance?

The point with these historical comparisons is not to guarantee that silver will either produce a 400% or 1000% return in the next 18 months to three years. Rather, the point of the comparison is to recognize that when the mood hits speculators and investors right, the white metal has a history of vastly outperforming even other inflation or crisis hedges like gold and other commodities. This performance comes at a price of course—there are vicious corrections and clearly more volatility associated with silver than with the broader, conventional stock market. But the rewards can be outsized.

The fundamentals for silver’s continued rise are still with us—and some would say they are stronger than ever:

  • Central banks purposefully trying to stoke the fires of inflation
  • Political instability visible on nearly every continent from the Ukraine, North Africa, to Venezuela
  • A weak global economy
  • Continued demand for alternative, non-central bank currencies (like bitcoin)
  • Continued fallout (quite literally it would seem) from banking scandals, plus continued complaints from trading partners regarding the reserve status of the U.S. Dollar (whether they ultimately can do much about it.)

And the list goes on—I’m sure you can think of some on your own.  So don’t count on silver necessarily making a big pullback here if you are on the fence regarding whether to buy or go long. Of course you always want to practice discipline, observe risk management and don’t put all of your eggs in one basket--- but the silver parabola might be ready for a reprise performance.

Don’t get left behind.


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Ryan Jordan currently teaches U.S history at the University of San Diego. He has previously taught at UC San Diego, Lafayette College, and Princeton University, where he received a Ph.D in 2004. His book, "Silver- The People's Metal," published in 2012, recounts the past, present, and future of the silver market.  Visit Ryan's blog:

During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.