We in America love our bubbles. We’ve seen the stock market bubble, the “dot-com” stock and the real estate bubble to name just a few. It’s great when they’re going in the right direction, but we don’t like them when they’re in reverse!
Silver now appears to be latest bubble, with gains of roughly 150% in value over the last year. More pointedly, The Los Angeles Times reports silver’s value is up 50% since December — the biggest gain of any commodity. By way of comparison, gold has only gone up 30% in the time that it took silver to rise 150%.
So people are obsessed with silver and this is not the first or the last time. Back in 1979, silver went up in one year by 500%. At the time, it was believed to be the greatest inflation hedge of all time. But after the run up, silver collapsed in value and it still is not back to what it was that long ago.
Now here we are again with silver really taking speculation to new heights. We’re seeing a lot of what’s called “momentum investing.” People get in this cycle where they think the sky is the limit. But if you think back to the dot-com days, you had companies being valued at billions of dollars before they even made their first nickel. We all know how that ended, with the bulk of them going toast!
In the case of silver, the fundamentals are not in place to support the run-up in value. And a further problem is that lightning has to strike twice: You need to know the right time to get in when values are low, and you need to know the right time to get out when values are at or near their peak.
Could silver go up another 500% or even another 10,000%? Yes. Could it also decline to a tiny fraction of today’s value? I can practically guarantee you that will happen at some point.
The problem with bubbles is that you don’t know when the air is going to come out. Think about housing. Way before housing finished its run, you had economists starting to theorize that real estate was in a bubble. Yet values continued rising month by month for several more years. We all know how that movie ended…and we’re still paying for the damage.
In the case of silver, a crash in value won’t have same the impact on the economy that housing did. When silver deflates, only investors will suffer the losses. So be careful out there!