Silver spot price matching Nikkei 20 years ago

London (Nov 5)   Eugene Fama jointly won the Nobel Prize in Economics this year for his work on efficient markets but market participants remain unconvinced that markets move towards equilibrium. In the efficient market hypothesis (EMH), prices in the long-run tend to go towards their fair value based on underlying fundamentals, unaffected by non-equilibrium fluctuations which are merely noise.

Silver futures rose in an anomalous fashion from 2000 till 2011, with a more than 800 percent return from the bottom to the peak, and the precious metal has been in a steady downtrend since May 2011 on a widespread recognition that it had become an asset bubble. Two-and-a-half years after silver reached its all-time top, the sentiment pendulum has decisively swung back, with precious metal bulls bewildered that they should be seeing further weakness on the horizon.

According to Erik Swarts, who pens the ‘Market Anthropology’ blog, the downward spiral in spot silver pricing from self-reinforcing negative expectations is comparable to the cascade of the Nikkei 225 in the early 1990’s. Swarts identified in 2012 that the precious metal had exhibited a decline and loss of momentum analogous to another asset bubble in the past three decades – the collapse of the Japanese stock market in the early 1990’s (see charts below).

The comparative study helped him anticipate silver’s upside pivot in the second half of 2012 and subsequent path lower this year. Swarts still sees “merit in contrasting Nikkei's historic breakdown and subsequent bounce” with the price action of silver, believing as he does that the odds favour another leg higher next year. If the analogy holds, silver may consolidate above 20.5 until the first quarter of 2014 before a sharp rally to 27-28, which could reverse completely the accelerated downtrend from 2013.

Right now, the silver spot price is trading around 21.822, down 0.2 percent intraday.