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Silver May Be Trading Below Its Recent Inflation-Adjusted High in the Year 2139


When silver outperforms oil, it loses purchasing power for a long, long time.

From August 31, 2005, to April 30, 2011, silver outperformed oil by 325%. That was the most the monthly silver/oil ratio increased over a 68-month period in the history of the data, which go back to 1860. In fact, it was the only time that the silver/ oil ratio quadrupled over that time frame. Let's look at the other times the silver/oil ratio tripled over a 68-month period.

As you can see, the top 10 readings came in four different years -- 2011, 1882, 1875, and 1980. Usually these silver studies often end up being "most overbought in history besides the 1980 top." So it is refreshing to come up with a couple of new years to examine. In order to avoid being redundant, let's look at the month the indicator was the closest to the April 2011 level in each year.

The second most extreme reading for the indicator was August 31,1882, when silver outperformed by oil by 298.13% over the prior 68 months. Silver did not go above its August 1882 price for decades. The precious metal proceeded to drop 56% and finally bottomed 21.16 years later in October 1903. Silver finally surpassed its August 1882 price in November 1919, which was 37.25 years later. From August 1882 to November 1932, silver lost 82% of its purchasing power.

Next up is the sixth highest reading on July 31, 1875. Silver was actually in the middle of a secular bear market here and was actually higher than it was in 1882. Silver dropped 65% and bottomed in October 1903, which was 28.25 years later. On an inflation-adjusted basis, silver reached its nadir in 1932, over 57 years later. From July 1875 to November 1932, silver lost 84.9% of its purchasing power. With respect to its nominal price, incredibly enough, silver didn't see new highs until May 1967! That is a whopping 91.83 years later.

The final example is our old friend 1980. We all know that silver went down over 90% nominally over the next 13 years. On an inflation-adjusted basis, silver dropped 95% from February 1980 to August 2001. On a nominal basis, it didn't test its 1980 high until over 31 years later.

Here is a summary table of the three previous signals:

When the silver/oil ratio triples over a 68 month period, silver's future returns are poor. Once the indicator peaked, there was no upside in silver. In each instance, silver experienced a 56% bear market that lasted at least 13 years. Silver did not hit new nominal highs until over 31 years later.

On an inflation-adjusted basis, silver was not a particularly good "store of value." In fact, it lost at least 82% of its purchasing power each time. Furthermore, it took silver over 21 years to reach its inflation-adjusted bottom. For example, silver put in its monthly closing low in 1993 at $3.62. However, by August 2001 it was still lingering at $4.16. While that is a 14.9% nominal gain, inflation was up 24% over that time. So silver didn't even manage to beat inflation during the first 8.5 years of its secular BULL market.

We can't really do an "inflation-adjusted new highs X years later," since silver is still nowhere near its February 1980 inflation-adjusted high. The silver bulls are saying that it is going to be coming any day now. However, they may want to consider that silver was still trading below its August 1882 inflation-adjusted high as recently as September 2010 and its July 1875 inflation-adjusted high on December 31, 2011. If silver behaves in the same fashion, it will still be trading below its 2011 inflation adjusted high in 2139 and 2147.
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