The flip side of manias are panics. In cattlemen's lingo they are called stampedes. The herd gets spooked, whether for good reason or just because it was time to run off some herd energy and all Hell breaks loose. Common sense flies out the window until the herd is run out of steam and then the cowboys can round them up again.
Prechter does a good job of explaining manias, especially in his 2002 book, "Conquer The Crash". It is well worth your time to read. Prechter teaches that manias have an exponential left side of the curve as everyone piles in and then when everyone and their brother is "all in" the herd runs back out as the bottom drops out. At the end of the day, true manias end up lower than where they started. Another characteristic of a mania collapse is that the object which went mania will basically be screwed for a long time and oftentimes forever. Too many people will have gotten burnt and confidence in the asset will have been lost by the herd. As you can see from the South Sea chart below, the mania fully retraced and then the company eventually went bankrupt because it was nothing but a valueless scam the whole time.
My humble opinion on the matter is that the silver chart will eventually form some sort of inclining double bottom and then take off again to reach new highs. In other words, and I do understand the credibility risk of putting this type of thing in writing, "it's different this time". I do not see silver fully retracing the mania price to below $9 again. There are several reasons for this view:
- The recent radical decline in silver was not touched off by a loss of confidence. Speculators had piled into silver on the COMEX on margin causing the price to rise exponentially. The volume of silver metal trading was so high that COMEX was at threat of defaulting on delivery. So COMEX raised its margin requirements dramatically which caused heavily margined buyers to sell in order to meet these requirements. This is what caused the recent pullback - the forcefull ejection of the leveraged gamblers, NOT loss of confidence in the metal as a store of value. IMO this is a critical differentiator from a mania. People holding physical silver did not have a chance to sell because it all happened too fast. Besides, nobody buys physical metal to flip it - flippers live in the SLV fund. Physical holders have always been long term holders of the metal thus removing that supply from the market. The reduced supply will put a floor on the price.
- Physical silver buyers have been active for several years now at below $25/oz. They did not all buy at $50 and thus they do not feel burned by the recent sell off. Despite the recent collapse in price, most physical silver holders are still right side up.
- Above ground silver levels are at a historic low and I believe this is happening at a time of rapidly increasing industrial demand for the metal. Unlike gold, silver is an industrial consumption metal. More to the point, gold gets mined and then hoarded whereas most silver gets mined and then consumed. While the economy has been stalled for the past couple years, technology continues to grow and silver is a technology metal. Of all the metals, silver is going to be in greatest demand for the required technologies going forward: electronic devices, solar panels, electric cars, new materials sciences, etc. Its physical properties of conductivity, reflectivity and malleability are standouts on the periodic table of the elements. The value of platinum skyrocketed based on industrial demand by catalytic converters used for emissions control of internal combustion engines. The rise in electric motor based transportation will fade platinum and highlight silver. In other words, silver is not just a token for wealth like gold is. Silver is a valuable commodity in its own right and it will eventually demand a premium price that will make $50/oz. seem like a good deal.
- Bernanke may be stopping with the money printing for now but this is only so that he can check to see if the shock defibrillation of the economy has worked. It's a cinch that it did not work given that jobs are not plentiful, salaries are flat and consumer prices for food and energy (nondiscretionary consumption items) are skyrocketing. He may wait the rest of 2011 to see if the holiday buying season returns to life. Heck, he might even get cocky and let the interest rates rise as if health has returned to the economy (or perhaps because congress stops letting him print up more money to buy treasuries with) but the reality is that the consumerist attitude of the herd is falling because the boomers, a large group which has high salaries and lots of wealth, are retiring. They are looking to cut costs, not expand their stuff. They will be selling assets and downsizing over the next decade. They will stop being economic adders to society and begin to be economic dead weight. Government cannot change that. The herd is bigger than the government. Because of this, at some point the presses will have to be fired back up again with a vengeance because without this the global debt Ponzi will collapse. That is a 100% given. People point to Japan saying that deflation can last 20+ years but they fail to admit that Japan's debt to GDP has skyrocketed to 200%. Deflation will at some point be replaced by massive inflation in Japan and the same will eventually happen in the US. Crooks are running the money supply and they will continue printing until they are kicked out. Unfortunately, everyone running for president is a crook except Ron Paul and he likely won't have enough support to win in 2012. Even if he does have the support someone else will be declared the winner IMO. The state of the criminal organization running the show depends on not having honest leaders.
