Mark McHugh

Remembering the Great Silver “Bubble”……..of 1974?

In Open Thread, Silver on Tuesday, May 3, 2011 at 10:16 am

2011 is not a replay of 1980 for silver.  No way, no how.  But recent price action is reminiscent of another time period.  Does this sound familiar?

In less than 12 months, silver doubled.  After a brief consolidation, silver surged another 33% in just six weeks, and without taking a breath, it exploded another 70%.  The shiny metal skyrocketed by more than 275% in 25 months, and prices stood 5 times higher than they had been  just ten years prior….

1980?  Hells no.  That’s what silver did from 1964 (the last year the US mint produced 90% silver coins for circulation)  until 1974.  I’m sure it seemed parabolic too, especially considering stocks had been stagnant since 1966 (and would remain so until 1978).  Here’s a chart comparing the interim high of $6.76 (times 10) reached on February 6, 1974,  and the 330 trading days ending 4/21/2011 (silver @ $46.26).

37 years later, I can still hear the stock momos of the day screaming Bubble, bubble, bubble, BUBBLE!  And for a brief moment in time, they appeared to be correct.  In the next 6 years, silver would “collapse” by 40%….only to explode again by more than %1000.

(Author’s note: The recent pullback in silver is not reflected on the chart, but closely mirrors its 1974 counterpart….I made the graphic last week and was just not inclined to redo it.)

But 2011 isn’t 1974 either…….

  • In 1974 US Gross Domestic Product was $1.49 Trillion,  today it is more than $14.6 T (+880%).
  • The US National Debt was $475 Billion in ’74, today it is more than $14.3 Trillion (+2,900%).
  • The US government  had a stockpile of 189 million ounces of silver vs. 7 million ounces today (-96%).

As big as the government’s 1974 silver stockpile might seem today, it was teeny-tiny sliver of what they once had.  From the end of World War II until 1974, the US government sold or consumed 3.8 Billion ounces of silver.  No one seems to know exactly how much was sold, to whom, or at what price, but surely most was sold for less than $2/oz.  

The late seventies run to $50 silver was characterized by a dominant buyer (the Hunt Brothers).  The US government, the Federal Reserve and the COMEX had to take drastic action to prevent the Hunts from cornering the silver market (and when crooked referees have to change the rules to make you lose, I consider it a win).  When the Hunts were disposed of, prices dropped sharply.  In recent years, the silver market has been dominated by a seller (JP Morgan).   What do you suppose happens to prices if the dominant seller is disposed of?  

In 1980, Federal Reserve Chair Paul Volcker had the testicular fortitude to raise the Fed funds rate to 20% to stop inflation.  It was the last time any serious attempt was made to defend the dollar.  Since then we’ve developed new “statisical methods”,  whose purpose is to ignore honest measures of money supply, unemployment and inflation (who needs food and energy?),  to justify suicidal monetary policy. 

 The other key development in 1980 was the enactment of the 401(k) laws: The biggest, bestest bailout Wall Street ever got.   The tax revenues anticipated by allowing tax-deferred (read tax-free) dollars to flood Wall Street will never materialize because the money isn’t there.  Consider this your hidden bonus track:

This is simply the greatest scam ever conceived and nobody has noticed yet.  Someday everyone will understand that chart,  I urge you to understand it now.

You can dress it up in your own mind however you want, but in late 2008, Wall Street went on life support.  It survival is now based upon the Federal Reserve’s willingness to print money,  Washington’s appetite for deficit spending and abandoning justice.  And the only “recovery” we’ve seen is in the bonuses of those most responsible for putting the system at risk in the first place.  Take away their silver before someone else does.

Silver is still in the early stages of another +2500% move, but despite all the chatter about having “adult discussions” regarding this or that, there aren’t any grown-ups present.  The odds that they will take the actions necessary to defend the US dollar are zero, and that’s all you really need to know.

But if you insist on having a sell signal…..

One of the side effects of killing the last big spike in precious metals was raising mortgage interest rates over 15%.  When that happens again, it might be time to sell silver.

Source: LBMA historical silver fixings

  1. I remember the Hunt brothers debacle and the “killing field” interest rates well back in the day. Last time silver was through the roof, I remember my Dad buying a brand new Silverado and paying in silver. Many places were giving prices of things in dollars or ounces back then.

    Interesting that that is not happening today, don’t you think? And you are right, if interest rates start to soar, beware the death quivers…

  2. Gomp,

    If you gave people a choice between a $1 silver eagle and a $20 bill, 95% of Americans would take the paper. They are so locked in to the notion of FRNs having value now. In 1974, they still remembered silver coins and a gold standard. Volcker had to treat the dollar like “real money” or it would have become a joke.

    We’re completely addicted to easy money now.

  3. I agree, somehow by getting dumber, they call it progress.

  4. […] Letztlich hat sich an den Fundamentaldaten im Silbermarkt nichts verändert. Somit ist es nur eine Frage der Zeit, bis Silber wieder steigt. Warten wir also geduldig ab und kaufen bei jedem Rückgang stur physisches Silber nach. Kauft das Silber, bevor es ein anderer tut! [Quelle: Across the Street] […]

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