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Silver's Price Action Nearly Parabolic, but Is a Bubble Really Forming?


Maybe. But recent price action could simply be a reawakening of what the true value of silver should be in a world of endless money-printing.

Every now and then, I like to run a comparative screen on my list of over 800 ETFs/ETNs to find those areas of the investable universe which are at extremes relative to the broader stock market, or relative to themselves. Given recent market actions and the incredible resilience risk assets have had as of late, I thought it might be worth identifying those ETFs/ETNs furthest away from their respective 50-day moving averages. The purpose of doing this is to see where the crowd has been putting money to work the most, and perhaps identify contrarian trades.

Silver by far and away is the furthest away from its respective moving average, nearly 18% on average for several silver-based ETFs (in terms of both physical silver, and silver miners which are the equity side of the equation). Gasoline and oil aren't that far behind, which shouldn't be a surprise given concerns about supply disruptions in the Middle East and the nuclear disaster in Japan. In tenth place is the Global Wind Energy Portfolio ETF (PWND) which has significantly underformed broader markets over the past few years. The logic here relates to the potential demand increase for wind turbines at the expense of all things nuclear.

The fact that silver has blown past all ETFs in the past 50 days, however, is worth noting and keeping an eye on. The silver market is in backwardation (meaning investors are willing to pay more for silver now as opposed to later in time), and every analyst I hear makes a compelling case for silver prices to go much higher. While it's certainly possible, I do believe in mean reversion, which generally resolves one extreme with another.

The price action of silver appears nearly parabolic in a pattern similar to the early phases of Internet stocks in the late '90s. Could it indeed be in the early stages of a bubble? Or is recent price action simply a reawakening of what the true value of silver should be in a world of endless money-printing? The only thing I know for sure is that prices will fluctuate.

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No positions in stocks mentioned.

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