Silver Bubble? Part Duh

[Louis: The "edit" option for your post below does not appear to be activated for me - so I will post a few points on the topic here]

I'm tired of hearing that the price of silver is increasing parabolically. I don't think that means what people think it means. Any asset class with a steady growth rate is going to appear "parabolic" on a linear chart. Is steady growth a negative thing?

If you can draw a trend line on a logarithmic chart, you have parabolic growth, folks.

Let's look at a logarithmic chart of the NASDAQ bubble:


Note the linear trend that lasted from 1975 until around 1998 (when the internet hyperbole hit). Thus, the NASDAQ grew parabolically for over 20 years! Also note the linear trend lines I drew following the NASDAQ crash of 2001 (i.e. until present). This is linear growth on a logarithmic chart, so clearly, the NASDAQ is in another bubble (if by bubble you mean growing parabolically).

On the other hand, parabolic growth on a logarithmic chart is cause for concern. It has to be, because if such growth continues, soon you'll run out of numbers. So, let's concede that that ends badly.

Is the price of silver increasing parabolically on the logarithmic chart? Before we get to that, note the gray circles I drew above on the NASDAQ chart. All examples of parabolic growth; qualitatively very similar, in fact, to the eventual blow off top. Why didn't those parabolic jumps end badly? A pattern seems to emerge:

Short-term parabolic growth on a logarithmic chart is OK when it takes the chart back to a major trend line.

Look at a logarithmic chart of the housing bubble.




Once again we see multiple decades of growth on a logarithmic chart that tracks a linear trend line. A hundred year bubble? Of course not. Also note, we see at least two parabolic increases on this logarithmic chart before the collapse of 2007 (black circles). But since those moves took the chart back to its trendline, all was well.

Now let's look at a logarithmic chart of silver.




(Unfortunately I could only find SLV, and even that only went back ~5 yrs). Clearly we see a linear trend (on the logarithmic chart) going back to the very beginning of the secular bull market. Yes, the big moves since August appear slightly parabolic on this logarithmic chart ... but then they've just taken silver back to the trend line.

Now, keep in mind, I could've drawn 10 different trend lines, and depending on exactly where they ended up, I could've easily made the argument that silver is overbought in the short term and needs to fall 10 dollars or whatever. But the trend line would still remain, and the silver train would still be in business. Moreover, since we've now approached the long-term trend line, if we continue to see parabolic growth on this logarithmic chart (e.g. a commerical signal failure), then we might have to expect a very sharp correction.

On the other hand ... if the fundamentals are strong enough, even parabolic growth on a logarithmic chart can last awhile before it inevitably ends badly. Here's a logarithmic chart of gold in Weimar Germany. You'll see my point of running out of numbers.


4 comments:

Warren said...

Mr GM Jenkins - Excelent work sir!

Warren said...

$100 bucks says we'll get comments here from Kid Dynamite or Brian O'Flanagan within the next 48 hours. ;)

Louis Cypher said...

Damn. So much for the social experiment. I ASSumed you guys could edit my posts and each others.

Louis Cypher said...

I just changed the permissions.
GM your point is well made about charts and stretching them or compacting them.