When Will Silver Bottom?

December 26, 2013

As silver closes out 2013 with its second straight annual loss, many are asking when (or if) silver has bottomed. I believe that silver has either made a bottom—or is awfully close to making one. This case is made all the stronger by the complete demoralization seen out there among some former silver bulls, who have lost their nerve and given up on the precious metals sector.

In my opinion, silver is going through a drawn out, meandering bottoming process—one that might take several months to unfold. So be patient, even as the bottom is in sight. 2014 may be more of a boring year for the white metal than anything else. Often enough in the history of commodity futures, bottoms do not come in a dramatic one day, or one week “V-shape” pattern. Instead, the bottom draws out over a period of months, as the price looks more like a flat lining- EKG. Both sellers and buyers are exhausted, as market participants follow other, hotter markets. This was the pattern in silver during one of its longest declines, from roughly 1987 to 1992, and to a lesser extent, this was the case during its nearly three and a half decline from 1968 to 1971. I should point out that these two bottoms took the price of silver down 61% and 48%, respectively.  (More recently, the dramatic, 60+% sell off in 2008 was an important decline in silver, but it took only 8 months to unfold, and was much more of a classic V-shaped bottom, as opposed to the kind of bottom I think we have now.)  The silver price decline, so far, has been roughly 63%, and has been on par with some of the largest declines the metal has seen over the last four decades.

The only exception to the above, of course, was the silver price decline of 1980-1982, from nearly 50 dollars, to just under 6 dollars, a decline of 88%. Most market watchers will tell you that the mania seen going into that price peak in silver was far greater than anything seen in 2011, and so the odds would seem to favor those who argue that a decline of roughly 60-65% should be enough for this decline in the white metal. Statistically, this decline is probably a big enough event to allow investors to buy here with some degree of confidence.

Whether this bottom represents simply a cyclical bottom within an ongoing bear market (as was the case with the 1987-1992 example) or a bottom within an ongoing bull market (like 1968-1971), does not change the fact that once silver put in the respective bottoms mentioned above, the resulting rallies were powerful. The case of the 1970s is well known (silver went up over 20 times), but the rally in silver off the 1992 bottom was nothing to sneeze at—the price of silver went briefly from below 4 dollars to over 7 dollars, or nearly a 100% return.

For as rough as the decline has been with precious metals like gold and silver, the decline has been even more devastating for those investing in mining stocks. Many of these stocks peaked three years ago, and several are down over 80% from their peak as I write this.

Using two different mining indexes, the Barron’s Gold Mining Index and the Philadelphia Gold and Silver Index (two of the oldest out there), we find that the current decline is roughly 60%. Since these indexes focus on larger capitalization stocks, they neglect to show the real carnage done to smaller companies over the past three years. But a 60% decline is among the worst for the major precious metal mining indexes—the two worst declines came in 1996-2000 (roughly 70%) and in 1980-1982, which also constituted a slightly greater than 70% decline. While we aren’t quite there yet- we are close- and therefore are nearing price declines among the worst ever in the mining stock sector. I don’t have to tell you that after such major bottoms are put in the mining stocks can appreciate more than 150%—even within the context of a secular bear market in mining equities, such as that seen in the 1980s.

During this year, people have been chasing the conventional equity market, and this has weighed on the precious metals sector. Comparing the silver market to the conventional equity markets, we see the stock market tracing out a very different pattern. The cyclical bull market in stocks is nearly 5 years old. The S&P500 is now up almost three times from its 2009 lows—a move that is rarely made without some sort of meaningful pull back or sideways movement. Although the equity bulls will point to decades like the 1950s and 1990s to show that we can move higher, the uninterrupted moves during those decades only averaged 7 years, before major consolidations (or worse), so there is no arguing with the idea that this particular stock move is long in the tooth.

Don’t forget that there are a thousand reasons to buy at the top, and a thousand reasons to sell at the bottom. People assume that the recent bearish trend for silver and silver stocks will continue out into the future indefinitely and this makes them unduly pessimistic at market bottoms. It is amazing to see even former bullion bulls relinquish their positions and give up—but then again, price collapses mean that even many of the former die-hards have thrown in the towel and moved on to whatever they perceive to be better, hotter investments at the moment.

In short, we are likely at some sort of major cyclical bottom in the precious metals sector, while closer than not to a top in the equity markets. There are no guarantees with investing, and the bottoming process in the precious metals may take longer than desired by dragging well into 2014. But let me remind you that the whole idea with investing is to buy low and sell high.

I really think it is just that simple.

Read more of Ryan Jordan's analysis at http://silvernewsblog.com/  where you can also learn  about his book, Silver--The People's Metal.


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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: http://silvernewsblog.com

US silver mining began on a large scale with the discovery of the Comstock Lode in Nevada in 1858.