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Silver Sets Volatility Record Going Back to At Least 1784


Silver's high volatility suggests we are in the early stages of a bear market.

In January 2012, silver finished the month up 19%. This was the ninth month in the last 12 when the absolute value of the monthly price change for silver was in the double digits. This set an all-time record going back to at least 1784 when the monthly data starts.

Let's take a closer look to see if excessive volatility can predict the future direction of silver prices.

The previous record for silver being up or down at least 10% in a month over a rolling 12-month period was eight months. Silver has actually done this on seven different occasions. All seven rolling 12-month periods ended in either 1980 or 2011. 1980 wasn't a particular good time to be investing in silver as silver dropped 91% in nominal terms from its January 1980 high to its February 1991 low. Throw in 73% inflation and the real return gets even uglier. While we don't know how important the 2011 top will be, it isn't getting off to a great start for the silver bulls either. Silver has already had a 47.7% decline.

The similarities between the 1980 and 2011 tops are striking.

In the nine up/down 10% months silver had up to and including its January 1980 top, all nine were positive.

In the eight up/down 10% months silver had up to and including its April 2011 top, all eight were positive.

After its January 1980 top, silver had three months in 1980 where it was down at least 15%.

After its April 2011 top, silver had three months in 2011 where it was down at least 15%.

Within nine months from the January 1980 top, silver also had two months when it was up at least 15%.

Within nine months from the April 2011 top, silver also had two months when it was up at least 15%.

So the pattern is, silver is very volatile, but the volatility is always up. The top is made. The volatility continues but then it becomes mixed with a few very nasty down months, but a couple of bear market rally months as well.

We have seen this sort of activity before in the NASDAQ. NASDAQ's record for number of +/- 10% monthly moves in a rolling 12-month period is nine. Yes, this is the same exact amount silver has now. This occurred in March and April 2001. It is interesting to note that NASDAQ had a 43.7% bear market rally from April 3, 2001 to May 22, 2001. However, those gains would prove to be short-lived. From top to bottom, NASDAQ dropped 78.4%. A similar drop in silver would equate to $10.68. This would place silver's price squarely in the pre-teens and a nudge away from the single digits.

Interestingly enough, the pattern for NASDAQ at the turn of the millennium was similar to 1980/2011 silver.

In NASDAQ's seven up/down 10% months up to and including its February 1980 all-time monthly closing high, all seven were positive.

After its February 2000 top, NASDAQ had three months in 1980 where it was down at least 13%.

Within nine months from its February 2000 top, NASDAQ also had two months when it was up at least 12%.

In 15 out of the last 17 months silver was +/- 8.5%. This is yet another record. Here are the times silver had more than 10 months out of 17 where it was up or down more than 8.5%:
  • December 1980 - March 1981
  • November 1983
  • July 2011 - January 2012
Let's see how silver did from the close of the first month in each group to its February 1991 low:
  • December 1980 -- down 78.7%
  • November 1983 -- down 64.5%
  • July 2011 -- down 34.6% in less than two months (thus far)
If silver would go down 64.5% from its July 2011 close it would hit $14.15. If it followed the down 78.7% analog, silver would trade at $8.49. Interestingly enough, silver's 2008 low was $8.47.

Here is a Paul Tudor Jones quote from January 2000 referencing the NASDAQ:

"…every time I've seen volatility like that, I don't care what the market was, whether it was soybeans in '76 or '83 or whether it was silver at the top in 1980 or whether it was some of the biotech stocks at the top earlier in the '90s, when you get that kind of volatility you know that generally that's associated with a top."
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