Saturday, April 9, 2011

Is Silver Getting Bubbly?

Silver's rising prices as measured in US government fiat dollars (alias paper funny money) spawns new articles on a daily basis predicting that surely now silver is in a bubble (a price that is irrationally higher than the intrinsic value of the product or investment). I suspect that as the "tears of the moon" metal approaches the 1980 high of $50 per ounce, the uninformed scare-mongering will only increase in volume. But is silver really in a bubble just because its worth as measured in rapidly devaluing 2011 US dollars is nearing the former 1980 peak?

Firstly, let's make sure we're comparing apples to apples, or at least dollars to dollars. Based on the CPI, you'd need $134.29 today in 2011 to purchase the same products you bought in 1980 for $50. So, while we can talk about the NOMINAL high of $50 for silver per ounce, the real figure we should be eyeing for bubbly signs is a lot closer to the $134 mark in inflation adjusted dollars.

Secondly, exact information as to what price point constitutes pricing above an item's "intrinsic value" is always a little sketchy, to say the very least. However, I'd like to tentatively submit the inflation-adjusted high for silver of $134 as that point, since the 1979-1980 bull market is the best and only historical comparison to today's market.

Next, I think a "real world" comparison of actual buying power of one ounce of silver for the years 1980 and 2011, may aid us in our search for buying power equivalency, and perhaps the actual 2011 point at which we may be entering bubbly territory. Therefore, I've collected the economic information below:

1980 $ Price - Price in Silver Oz. @ $50 per ounce

Avg. New Home $76,400 - 1528 oz.

Median Household Income $17,710 - 354 oz.

First Class Stamp $0.15 - 0.003 oz.

Gallon Regular Gas $1.25 - 0.025 oz.

Dozen Eggs $0.91 - 0.018 oz.

Loaf White Bread $0.50 - 0.01 oz.

Next, we'll look at the 2011 - Silver @ $41 per ounce

Avg. New Home $202,100 - 4,929 oz.

Median Household Income $52,029 - 1,269 oz.

First Class Stamp $0.44 - 0.01 oz.

Gallon Regular Gas $3.75 - 0.09 oz.

Dozen Eggs $3.00 - 0.07 oz.

Loaf White Bread $2.78 - 0.07 oz.

It's easy to see from these two pricing tables that you need a lot more silver to buy everyday items in 2011 than was required to purchase the same products at the peak of the 1980 silver bubble. For example, you could purchase an average new home in 1980 for only 1528 ounces of silver, but you'll need 4929 ounces to close on that same house today!

Finally, I'd like to see how high silver would have to rise in price before it could buy the same amount of products it did in 1980. To determine the 2011 dollar adjusted figures I'll divide the current 2011 dollar product costs by the number of silver ounces required in the 1980 peak. See below:

Avg. New Home - $132 per ounce silver

Median Household Income - $147 oz.

First Class Stamp - $147 oz.

Gallon Regular Gas - $150 oz.

Dozen Eggs - $167 oz.

Loaf White Bread - $278 oz!

The incredible numbers above show that silver will have to rise to between $132 to $167 per ounce to arrive at pricing levels in 2011 dollars that proved to be overheated or bubble-ridden in 1980! In addition, if you want to eat bread again like we did in 1980, you're going to need silver at $278 per ounce! So, our tentative figure of $134 per ounce for a silver top is pretty right on the money.

Given all the information above, I'd say we have quite aways to go with silver at about $41 an ounce before we reach any frothy action! For my part, don't even wake me until silver has exceeded $100 per ounce!

Time is running out fast! Hyperinflation seems unavoidable as fiat paper money is being printed as fast as the US presses can run. To protect your wealth and your family, buy gold and silver now from these top companies, APMEX Gold and Silver and Silver American Eagles.


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