SILVER IS TRACING OUT 1980 POST-BUBBLE PATTERN

Tom McClellan – McClellan Market Report

comparing 1980 and 2011 silver tops

Chart pattern analogs have long been a popular way to get an insight into future price structures.  When you see a structure in the current market that looks a lot like a structure in a previous period, then you can use the data from that previous period to look ahead to what current prices might do, assuming that the pattern resemblance continues.

It is a standard principle of science that experiments should be repeatable. The rules of physics should operate the same way everywhere.  So if you drop a brand new tennis ball in New York, it should bounce the same way that a brand new tennis ball bounces in Melbourne. The rules of market physics are a lot different and often more variable than the rules for the physical world, but the presumption behind chart pattern analogs is that if you are seeing the same behavior, then the same sorts of inputs and rules of motion are at work.

This week’s chart takes a look back at the silver bubble of 1980.  That famous episode resulted from an attempt by brothers William Herbert Hunt and Nelson Bunker Hunt to corner the silver market.  Prior to the run up, silver prices had been trading in the high single digits, then jumped up to between $15 and $20 before starting a parabolic move to $50.  At the point when silver hit $50/oz, the CFTC and the Chicago Mercantile Exchange intervened with restrictions on position sizes and higher margin requirements.  That effort broke the Hunt’s corner play, forcing traders to sell to meet margin calls.  The initial decline took silver futures down from an intraday high of $50.36 to a low $30.25 in just 3 days, and to a more solid intraday low of $33.10 6 trading days after the top.  Just 2 months later, silver was back down below $20.

I have not read it yet, but my friend Ian McAvity recommends the book Beyond Greed by Stephen Fay for insights on that whole 1980 silver bubble episode.  Ian has been writing the newsletter Deliberations since shortly after the earth’s crust cooled, and he is a well known expert on the precious metals markets.

I thought it would be interesting to see how the silver top of 2011 might compare to that 1980 episode.  One big point of similarity between the two events has been the efforts of the CME Group (successor to the Chicago Mercantile Exchange) to raise margin requirements for futures traders in order to curtail excessive speculation.  And the $50/oz level appears to have been the price that the CME group wanted to defend, just as in the 1980 episode.  Like the 1980 example, silver’s first stop on the way down from $50 was an intraday low at $33.54 just 6 trading days after the top.

The key point of difference between the two periods in this comparison is that I had to bend time a little bit in order to align the other chart structures.  The patterns look the same, but the current silver market is taking about 20% longer to trace out the same dance steps. The vertical grid lines in each chart are spaced 21 trading days apart (1 month), but the horizontal spacing of those lines is different in the two charts.

Why the current structure is taking 20% longer to make the same moves is an interesting question, but for as long as the price patterns continue to correlate we don’t really need to find a precise answer.  It may be that changes since 1980 in what I like to call the “viscosity of money” are responsible for this change in the rate of price pattern progression, just as the action of a water filled wave pool would be different from one filled with some other fluid.

Looking ahead, if the current silver market keeps following the pattern made by silver prices in 1980, then we should look for a resumption of the decline starting in late June.


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McClellan Financial

The McClellan Market Report and its companion Daily Edition are produced by Sherman McClellan and Tom McClellan. Both are technical analysts and educators whose innovative insights have helped countless investors succeed. The McClellans' work has been repeatedly quoted in Barron's, and their market timing signals have ranked them in the top ten timers for both intermediate and long term by Timer Digest.

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Comments

  1. Cullen, my lack of experience in technical analysis makes me wonder if this is really relevant. When you think about it, things are never “the same” simply because we evolve so much and so many things are different today than from the 80′s. In your opinion and according to your own personal experience, do you believe in this analysis your are providing here and why?

    Regards.

    • I didn’t write this piece, but I use technical analysis more as a supplement to fundamental analysis. It’s like reading a book. The real meat is in the words, but pictures can be quite helpful in visualizing and understanding the data. Of course, being able to understand history (which is a big part of TA) helps enormously….But would I rely on it alone? No.

  2. Hi Cullen. I’m new here. Do you believe your analysis to be accurate considering you use nominal prices rather than inflation adjusted prices?

    Also, would one not need to consider how the situations are different considering
    1) U.S national debt (and the debt of many other developed countries
    2)The extreme increase in silver’s industrial use (without a corresponding increase in silver mining) – ie a net decrease in available silver
    3) a voracious increase in silver demand from investors

    • Franky,

      Also, would one not need to consider how the situations are different considering
      1) U.S national debt (and the debt of many other developed countries
      2)The extreme increase in silver’s industrial use (without a corresponding increase in silver mining) – ie a net decrease in available silver
      3) a voracious increase in silver demand from investors

      All excellent points. Soon people will wake up to the real story.
      History will repeat itself but not in the way of 1980. With the continued debasement of world currencies, including and especially our own dollar, precious metals and particularly Silver will experience much higher prices.

      For more information: http://www.BestPriceOnSilverGold.com

  3. It is stupid to follow this analysis because pf following reasons:

    1) It is 2011 and that means it is not 1980′s economy.

    2) Along with passing of time, the rates of commodities including precious metals have gone higher. I think Silver should touch a new high, may be $60-$65 in the next run to prove this analysis wrong. It should get steady around 38$-39$ an ounce.

  4. Wow, Volcker and Bernanke are completely different (as they should be: they are facing different problem). If the fed funds rate hit 20%, no-yielding PMs would have a completely different (lack of) value proposition.

    I’d be surprised if history even rhymes here.

  5. Everyone is so obsessed by 1980. EVERYTHING has went to new and higher price levels since 1980, but all these shorters seem to think the 1980 crash has to repeat it self! They didn’t do they same shotty comparisons to gold which has remained at it’s higher valuations.
    This is junk.

  6. Im sorry to say this analysis will hand your head on a platter. This is not akin to comparing apples to ornages but more like comparing apples to elephants. To begin with comex did not raise margin requirements to nail the Hunt brothers but they went into liquidation only mode. That meant that the only accepted trading allowed was selling, bids disappeared finding support $15 lower (guess who?). Do your own research to find out. Thanks for trying though.

    • Absolutely right. Silver will never trade at value until shorts are stopped from trading in the ground ore as if it were a refined product.

    • OK I can’t claim to have done research on this. However to say that at some point in 1980 only selling was allowed doesn’t make logical sense. Who did the sellers sell to? Buyers. You can’t sell into thin air. Perhaps the open interest declined. A rapid increase in the proportion of sellers to buyers will bring down the price. Each new lower selling price has to have a buyer at that price. If that buyer is a new buyer he/she will obviously lose money with even lower prices but someone exiting a short position from the top will profit by buying. I know this is obvious but in the context of this article it merits spelling out.

  7. When the charts STOP paralleling (assuming they are in the first place) the 79-80 chart, will do you a followup article? Since charts have a fractal nature, expanding/contracting the time-frame is problematic at best. The real issue though is the mentality of thinking you can predict the future, and doing that by using little more than chicken bones and bits of string. When you get your hands on a DeLorean Time Machine, then you might be onto something.

  8. Silver is precisely tracing out the bubble model developed by Didier Sornette–price swings logarithmically increasing in amplitude and frequency, pointing to a “critical” time point of instability where a crash is likely (not guaranteed, but that’s what seems to be playing out in this case). What follows in Sornette’s model is an inverse of the pattern that lead up to t-sub-c. C’mon–is there any *credible* analyst who really thinks silver is worth more than $25/oz? With no demand growth and long-term inflation near zero?

    I expect at least one comment citing Sornette’s “miss” when he predicted another down leg early in 2003, so I’ll address that right here and now: The model predicts critical instability time points, which, Sornette is quite specific in explaining, do not necessarily result in crashes.

    Oh, yeah–gold is next:

    http://seekingalpha.com/article/244036-will-the-gold-bubble-burst-in-2011

    http://stockcharts.com/h-sc/ui?s=$GOLD&p=M&st=1994-01-01&en=(today)&id=p70533570118&a=177999886

    • “No demand and no real long term inflation”?

      Two part question for you. Do you live in a bubble or just on another planet? The comex isn’t about to run out of silver because there is “no demand”, and there were not silver/gold ETFs in 1980 buying up all the bullion. So what planet do you live on where there is no demand?
      An oz of gold in 1955 would buy 153 gallons of gas. Today an oz of gold buys 375 gallons of gas. There is no inflation when pricing in silver and gold, but when pricing in dollars, you would have to be a blind, idiotic, fool to say there is no inflation. But, hey, if the shoe fits………..

      • i was going to say pretty much the same thing, but i will add that we are about to hit hyper-inflation in the next few years as the dollar continues to collapse and the Fed continues the ponzi scheme of printing debt to buy debt and charging the US government interest to use its own money. This is insane and unsustainable and will eventually lead to the total collapse of the dollar; removal of the dollar as the worlds reserve currency(plans already being discussed to do this); default on our debt; and a new currency. so yeah, keep lying to people dumb enough to believe you that there is “no long term inflation” someone will believe you and get scared and dump all there silver and hold a worthless fiat currency and have their wealth stolen from them by people such as yourself. by the way, our money supply was doubled as a result of the bailouts, that should have been instant 50% inflation, but it is taking a while for prices to catch up because of all the manipulation of the markets by the Fed and others powerful enough to manipulate. the ONLY reason silver hasn’t hit $100 per ounce yet is the massive short positions by companies like JP Morgan and others manipulating the silver market. so either stop lying to people or take your head out your ass sir!

  9. Hey folks,
    In terms of TA, the first assumption is that everything is priced in charts. Someone argues that you can’t predict future with the data from the past but all the data we have stem from the past. So the argument of TA doesn’t sound appealing if one argues with those two reasons. I think that nobody knows exactly how it is going to play out at this moment. But often times past price movement provides good guidance. Do not be so dogmatic about the potential of silver. In every bull market, there is fluctuation of prices.

  10. there are totally different reasons for the run up in the first place…

    this run up starts again….if it already hasn’t.

    • You got that right. This runup wasn’t engineered by two people as a raid on a trading system. Demand from millions is draining physical supply. The speculators jumed on, and the casino bosses forced then out quick. It won’t stop the little guys from buying silver eagles. Especially at a good price.

      • roggie that cap’n…….the kicker will be in the final moves at the announcement of QEXX when the GLD n SLV people realize ‘that’ paper is more empty promises in a debt/print spiral.

        when GLD is going down n phys is going up—the beginning of the parabolic move.

  11. Unfair comparison…the two events have little in common. A six month review shows Silver is in a position of 28.6% gain (at the moment) from SIX months ago. December 9th, 2010 thru 0800 hrs June 6th, 2011. It rose too fast…some panicked; some got greedy…it has stabilized and continues to be a great investment…BUY PHYSICAL…make the paper people produce what they don’t have.

  12. wow…this could be the stupidest articles I`ve seen in awhile. The motives and causes of the silver moves in the 80`s in NO way reflect whats going on today. In the 80`s the Hunt bros were attempting to corner the market…today we are watching a global collapse of fiat currencies. Completely different crowd playing this time around. The move to physical gold and silver is GLOBAL…and its not going away. At this point we are mearly arguing about the bar tab on the Titanic.

  13. “This time it’s different.” If you have not heard that, you will. If you have not considered it, you need to. The position of the U.S. government in 1980 was bad. From FDR through Jimmy Carter, Presidents and Congresses had gone crazy buying votes with taxpayer money. But as a matter of degree, it was peanuts compared to what the GWB and BHO administations and their Congresses have given us. Peanuts. Much of the silver buying today is by true believers in the SHTF/TEOTWAWKI reality. They will keep buying. And, for as long as BHO and Congress dilly-dallies will debt, deficits, and higher taxes, more people will become true believers. This time it’s different. This time, there are millions of people buying out of fear for their futures–and tens of millions will enter the market in the months to come.

    • Hair on! So true.
      The two periods are really not comparable.
      I will keep buying because nothing else will protect your savings like PMs.
      I have often said, you will not ‘make’ money on PMs, but you will protect your purchasing power and that will put you ahead of 80% of the population.

  14. When I see an article so far from reality I have to think it is just a sentiment check.

    I’ll take tech analysis anyday over fundamentals because there seems to be so much information that is unknown but it is in the price.

  15. As an investor in AG since 1964 I can assure you that this is different. As far as inflation is concerned the dollar has dropped over 25% since 2000 and it will continue as the Elite Ruling Criminal Class have no intention of changing thier looting of the American people. Silver is a store of wealth more so today than at anytime in our history.
    Personnaly I don’t care how much others own as I keep 60% of my assets in AU and AG and I sell rarely and buy aften

  16. Agree with Bear Stearns comments. Sometimes people who like charts have to incorporate some common sense.

  17. Technical patterns can be a great tool, but they should be used as a fine-tuning tool to your investment approach. Market sentiment and market trends never be forgotten.

    If everything was determined by an algorithm, then there wouldn’t be any star investors, because everyone could just plug in the numbers, go on vacation, and forget the account. However, we all know it doesn’t work that way.

  18. The margin rates were raised so that J.P. Morgan and company could cover their short position, or in another words cover their asses! It was not done to curtail speculation as this author suggests. Either the author is un aware of the currupt nature of the markets or he is covering up for the crimex, that is comex. I am horrified by the utter audacity of those in power and the blatant way they go about their buisness. It’s as if we are sheep waiting to be slaughtered….oh wait…we are!!

    • Started silver purchases late 2010 after real consideration of what my savings would be worth if/when we repeat Weimer Germany and what could be used to make everyday purchases. Latest purchases have been influenced by my dislike of JP Morgan and hoping I would help them lose more in the ‘shorts’. I suspect that the correction from high $40s to mid $30s only minimized their losses? Or somehow, are they still winning?

  19. Not an “apples-to-apples” comparison.

    The situation in 1980, when the Hunt Bros. were in their heyday, is very different from today.

    1. Inflation has more than halved the value of the dollar, even according to the jiggered CPI, so $100 is the new $50. Silver is at a third of what it was at the 1980 peak.

    2. The financial situation is far more serious than 1980. We have $14T in debt, with another $100T in unfunded liabilities. Obama and Congress are running a $1.67T deficit- 40% of the govt spending that they are admitting. There are other “secret commitments, with no end in sight. Federal tax revenues are only 60% of expenditures, they are literally creating dollars (not really money) out of thin air. Commercial and personal debt is only a little off all-time highs. Real estate is dead. Banks are actually insolvent, but pretending to be fine by abandoning mark-to-market accounting and accepting trillions in nearly free “money” from the Federal Reserve.

    3. There are an estimated $600- $1000+T in derivatives, which will be triggered upon defaults or interest rate rises, which could take most of the world down.

    4. Foreign creditors are abandoning the dollar and clearing transactions in other currencies, reducing the role of the dollar as THE reserve currency.

    5. Other nations have similar problems. The Euro is similarly overextended. China is heavily depend upon America and Europe. Its currency is pegged to the dollar.

    6. Since silver was severly undervalued, since the dollar is tanking, since our “leaders” are destroyiong our economy and money, since silver was currency and money and will be again, I think it has a good future.

    I would not be surprised if the manipulators and a general downturn brought it down temporarily again. They showed their power to do that in 2008.

  20. It’s tough to make Predictions, especially when it’s about the future.

    Financial oomparative analysis of the past to the future is sometimes the assumption in the ‘Law of Ground Hog Day’?

    The future ain’t what it used to be, nor is it always ours to see; however, it is ours to experience – be prepared.

    The electronic zeros today are not worth as much as the zeros from the past – think about it.

    Nothing from nothing still equals nothing!!

    Static is not Static. Shocking, isn’t it.

  21. The government and the criminal banks will be exposed for what they have and are doing in the pm markets. It will cause the global population to take the metal prices to the heavens. You have been warned!

  22. Many are saying ‘not a fair comparison’ and I agree for many reasons, the primary one the drop in the dollar these past thirty-plus years.

  23. The only thing that is common between the two drops is the action of the Regulators (Government) to halt the advance. That is significant, but the charts, as always with Ian McAvity, are thrown in for cosmetic purposes, mainly. They don’t tell us when or where Ag is going. He too often uses them to justify gut feelings. (I subscribed during Carter’s term).
    Computer trading is much more powerful today, and the trend being broken forced the “programs” to be halted. Different ball game for awhile, and the Public is not yet in the game, as far as I can see. Photography is no longer a major demand support, so the present strength looks to me as more solid than back then, with the Hunts driving a small commodity market.
    I expected (hoped) to see the drop continue to a small support area around $28-$30, but more strength is being shown than I expected.
    I will add if it gets below $30, but it doesn’t look like that’s in the cards. When a market is rigged, confidence is definitely going to be rare, but there is no selling pressure; just caution and holding.
    Regards,

  24. Why is it that experts do not consider two very significant factors in projecting trends in silver:
    1. Since the 80s, we have had inflation to the tune of over 120%. That fact alone, if applied to the $50 price of silver says the peak should be $110 per oz to be equivalent in todays dollars (pitiful currency policies).

    2. In contrast to the 50s, guess what,there are hundreds of millions more folks who are aware of silver and gold…India and China. Tell them their currencies and especially the dollar are as good as gold (or silver).

    It is time for the pundants to wake up and consider all the factors and not just some convenient number representing a disconnect with the economic world today.

  25. Why did you not make a comparison of charts from the ’04, ’06, and ’08 peaks in silver? Is it because these similar chart patterns do not support your conclusion?

  26. I simply can’t understand why so many so-called experts don’t see the obvious: the dollar is well on the way to worthlessness, and economics 101 says that when demand exceeds supply, prices go up. The only reason the price of silver is not much higher is because of manipulation by the shorts (JP Morgan/Chase and a few others) and to their everlasting shame, the COMEX and Geitner. They were hoping the manipulation that caused the recent decline would cause much steeper losses, but the supply/demand fundamentals are stronger than their deceit. I’m staying long on silver.

    • Of all the commentators, Bob is I think the most succinct w/the most correct responses. He did not have the benefit of knowing that here in Canada the black swan has arrived w/the exposure of Nadler’s Ponzi scheme at KITCO, which has the potential to cause an immense upheaval worldwide in Silver first, then Gold.

      You can follow it at this url: Revenu Quebec Investigates Gold Fraud:
      http://business.financialpost.com/2011/06/10/revenue-quebec-investigates-massive-gold-fraud/
      which came out only on Friday, 11th June, here in Canada.

      As always, TPTB release these epochal notices on Fridays or during the weekend, which allows them to get their guns in place before the markets open.

      Finally, margins and other aspects of the metal trades can be adjusted ad infinitum, but what ultimately matters is whether the metal is delivered. PERIOD. Either it’s there or it is not.

      No matter how much scrap and salvage S comes out of the woodwork when the price hits highs, there’s always some held back by those seeking a higher price, perhaps because for them its presence is an article of faith in ultimate realities, and part of their life’s survival. And the cycle renews itself….

  27. What a crock!!
    Times they are a changin!

    We live in unique times with unique forces at play.

    Any similarity in squiggles on a chart are coincidence.

    • Hey Dan. Like the navigator on the Titanic. He new exactly where he was when they Hit The Iceburg.
      Also like your discription as Sqigles on the chart.
      Jim

  28. You think it is the same situation?
    In the 1980s two greedy rich men tried manipulate the market up for profit;
    Now mom, dad, and grandma are in the market because they believe the country has an unsustainable debt, and Goldman Sachs is trying to manipulate the market down to cover their shorts.