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Indicator Suggests No New Silver Yearly Closing Highs Until 2034

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Prudent value investors should wait eight to 13 years before making a long-term commitment in silver at what will highly likely be considerably lower levels. Here's why.

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A recent article in this series on commodities suggested that by the reliable gold/real estate index ratio, gold is the second most overvalued since 1890 (see Why It's Extremely Risky to Hold Gold Now). Let's take a look at gold's little brother and see if this indicator works on silver as well.

The silver data is from chartsrus.com and the real estate data is from Robert Schiller. Without further ado, here is what happened after the silver/real estate index reached its highest readings:

#1 1979 Silver went down 88% from its 1979 close to its 1991 low (a little more than 11 years). Silver did not finish a year above its 1979 close for 31 years. The next two years after the signal (1980 and 1981), silver went down 43% and 48%.

#2 1980 Silver went down 78% from its 1980 close to its 1991 low (a little more than 10 years). Silver did not finish a year above its 1980 close for 29 years. The first year after the signal (1981), silver went down 48%.

#3 2011 ???

#4 1891 Silver went down 49% from its 1891 close to its 1902 close (11 years). Silver did not finish a year above its 1891 close for 27 years. The first three years after the signal (1892-1894) silver went down by over 11% each year.

#5 1890 Silver went down 53% from its 1890 close to its 1902 close (12 years). Silver did not finish a year above its 1890 close for 29 years. The first four years after the signal, silver went down at least 9% all four years.

#6 1892 Silver went down 41% from its 1892 close to its 1902 close (10 years). Silver did not finish a year above its 1892 close for 25 years. The first two years after the signal, silver went down by over 11% both years.

#7 1919
Silver went down 81% from its 1919 close to its 1932 low (a little less than 13 years). Silver did not finish a year above its 1919 close for 45 years. The first year after the signal, silver got cut in half.

#8 1982 Silver went down 68% from its 1982 close to its 1991 low (a little more than eight years). Silver did not finish a year above its 1982 close for 24 years. Silver went down by 7% each year for the next four years and down at least 5% in nine out of the 10 years after the signal.

As for the #9 reading, that was 2010. Thus far, silver is up 32% for the year. However, before popping the champagne corks, one may note that silver was up even more in 1980 after the highest ratio of all time (1979). However, by the end of 1980 silver finished down 43% for the year.

In all the top-seven prior signals, silver did not reach a higher closing high for at least another 24 years. All readings signaled at least a 41% bear market. All bear markets lasted at least eight years.

So if history repeats, silver would drop somewhere between 41% to 88% (which would equate from $18.19 to $3.70) and bottom around 2018-2023. New yearly closing highs would be reached again in 2034-2041 with an outlier at 2055.

This is a very robust indicator as it covers four distinct time periods on the "sell" side circa 1891, 1919, circa 1979 and 2010. This proves that the signal can work in different environments.

Let's turn this around and look at the silver/real estate ratio when it was at its lowest levels.

#122 2002
up 723% in 8.3 years (+29% annualized return)
#121 2001 up 780% in 9.3 years (+26% annualized return)
#120 2003 up 564% in 7.3 years (+29% annualized return)
#119 2000
up 753% in 10.3 years (+23% annualized return)
#118 2004 up 479% in 6.3 years (+32% annualized return)
#117 1992 up 967% in 18.3 years (+13% annualized return)
#116 2005 up 350% in 5.3 years (+33% annualized return)
#115 1991 up 905% in 19.3 years (+12% annualized return)
#114 1932 up 16,728% in 47.1 years (+13% annualized return)

These returns stand as a marked contrast to the times when the silver/real estate ratio was high.

Another interesting aspect to this is the all-time low in the real estate/silver ratio was less than nine years ago. In that time span it has worked its way from the 0% percentile to its current 98.35% percentile. So this indicator does not appear to have any major secular trend creep issues. Sometimes indicators based on ratios do not work anymore as one asset goes up much more than the other one over decades. However, this does not appear to be the case at all.

Could silver go higher? Sure, it can always go higher. If the silver/real estate ratio would equal the 1979 high (assuming flat housing) it would close the year at $96.81. If the ratio would equal the 1980 high (assuming flat housing), silver would close the year at $50.34. We are currently at #3 high right now. However, remember silver dropped 88% from its highest ratio. So even if silver reached the equivalent $96.81, if it dropped 88% like it did in the first ratio it would drop to $11.61. As for the #2 it would go down to $11.07 based on its 78% decline. So even if silver would replicate the famed 1979 blow off top, it would still eventually go 70% below its current price.

These indicators are very long-term in nature and are little help with respect to predicting what day the exact high of silver will be. However, it is clear that silver is currently at the greater fool stage of investing. In summary, prudent value investors should wait for another eight to 13 years before making a long-term commitment in silver at what will highly likely be considerably lower levels.


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