Thursday, January 13, 2011

Silver Needs To Go To $135 To Touch Historic High Of 1980


NEW YORK (Commodity Online): Investors have been going bullish on silver. Silver has been on a bull run along with the glittering gold in the last one year, driven by the commodities super cycle that is on these days.

In the last one year silver price has soared from $17 to touch a 30-year high of $30. But despite the record rise in silver price, it has not yet caught up with the historic surge in silver price that happened in 1980.

According to silver bulls and commodities analysts, if we compare the 1980 of silver at $48, today’s silver price is insignificant.

Precious metals analyst Adam Hamilton says “on January 21st, 1980 at its all-time high, $48 silver translates into $135 in today’s dollars.”

“In other words, it would take $135 today to equal the purchasing power of $48 three decades ago. Per the lowballed CPI, it takes 2.81 dollars now to buy what a single dollar bought then. You can thank the Federal Reserve for this enormous stealth tax that has eroded all the capital you have saved ever since,” he points out.

So where is silver heading? Can it touch $135 in 2011? Or can it go $50 as some silver analysts have predicted in December 2010?

David Johnson, a precious analyst, says that silver is headed for higher prices thanks to the increasing demand for the white metal for industrial use and for jewellery purposes.

“More and more silver demand is coming from countries like China and India for industrial and jewellery needs. While industrial use of silver is soaring in China and India, rising price of gold jewellery is forcing people in these countries to opt for silver jewellery,” Johnson points out.

Barclays Capital says in a note that recent consolidation in silver has not dampened the bullish view. Referring to silver in dollar terms, it said: “Daily momentum studies have unwound from overbought levels and now offer opportunity for further gains”

“We expect buying interest above 28 to underpin a rally through Monday’s 31.26 high and target a Fibonacci projection at 33.20.” The bank says a seasonality chart for silver also suggests January as a likely month for an advance.

“The historical median gain suggests that we could well close the month in the 31.35 area, while the historical mean average gain calls for a rally extension to close the month in the 32 area,” Barclays said.

One of the most fascinating analysis of silver’s historic rise has been penned by Adam Hamilton:

At $30 silver today is only 22% of the way to matching its blow-off parabolic top at the end of its last secular bull in early 1980. Considered another way, silver would have to soar 350% from today’s levels before it could exceed its all-time high! So while $30 certainly feels high compared to recent years’ silver-price history, compared to the end of a mighty secular bull it is actually relatively low.

Silver stayed above $30 real more or less continuously between August 1979 and April 1981! Any price that persists for 19 months is nowhere close to being a bull-killing topping level. The popular mania that drove silver stratospheric in late 1979 saw it exceed $100 real on just 20 trading days, and it closed over $125 in today’s dollars on only four days. All the Wall Street arguments implying today’s $30 is so high that silver’s bull has to be over are just plain incorrect, historically myopic.

Nevertheless, silver is sure not cheap today at $30 either. By its own bull-to-date standards, silver has been super-overbought continuously since early November. It surged then when the Fed announced it was monetizing vastly more US Treasuries, or creating new dollars out of thin air to buy Washington’s debt. Being stretched so high on a short-term basis means a typical sharp silver correction is highly likely. These healthy retreats are usually big and fast, lopping a quarter to a third off silver prices in less than six weeks!

So while you can’t use this long-term real chart to ignore silver’s overbought technicals, you can sure use it to show silver’s secular bull is nowhere close to extreme yet. While silver did rally 76% between July and December 2010, no mean feat, this recent upleg looked nothing like a popular-mania parabolic blowoff. Between August 1979 and January 1980, a similar five-month span, silver skyrocketed 450% higher! There is just no possible comparison between that legendary parabola and 2010’s autumn rally.

Whenever I delve into real silver, I can’t resist looking at that 1970s superbull rendered in today’s dollars. While silver is indeed a great investment during a secular precious-metals bull, the memories of what really happened in the 1970s have been seriously distorted. Silver enthusiasts, usually inadvertently but sometimes intentionally, tend to misrepresent exactly how that last secular bull played out.


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