How Silver Lost Its Shine

Photo by Chris Ratcliffe, Bloomberg Finance/Getty Images.

With all eyes on gold lately, some may wonder about silver. The story here, folks, is the same: Silver is oversupplied relative to demand, and it has paid the price. The silver craze was a short-lived bubble that burst four years ago and has continued deflating since.

While usually a niche investment to say the least, for a brief period in early 2011 silver was all the rage. When commodities were booming, silver was at the forefront, rising 421% from its October 24, 2008 low through its April 21, 2011 peak. It was gold's cheaper cousin, with many claiming it had the same hedging properties (a myth) and more industrial use. One widely shared video claimed it was a must-own in front of America's allegedly looming doom.^[i]Many suggested buying silver as a way to hedge against stocks, the dollar or Europe's debt crisis.

The big returns weren't lost on investors. Investing columnists answered reader questions on silver. Retirees and individual investors were diving in deep. Right before the peak, analysts discussing silver dismissed the notion it was frothy, claiming prices had much, much further to run. This sharp increase in popularity can be seen in search terms as well. Googling of "silver investment" massively spiked in early 2011, peaking the same week silver prices reached their zenith. (Exhibit 1)

Exhibit 1: Google Search Term "Silver Investment" Popularity and Silver, 4/21/2007 - 4/21/2015

Source: Google Trends and FactSet, as of 7/22/2015.

Now, search terms aren't an ironclad way to measure sentiment, but in this case they do illustrate the extreme heights sentiment toward silver reached. It is also largely why we began an April 28, 2011, article on this website thusly:

Silver!

Have we caught your interest?

Since the spike in popularity, silver has slumped, a protracted downturn typical of bubbles, as investors fight the last war for extended periods of time. Exhibit 2 compares the Nasdaq Composite Price Index from 3/8/1996 - 3/10/2004 to silver over the period 4/21/2007 - 4/21/2015-matching eight year time frames around the relative price peaks. Silver's rise and fall are strikingly similar to the Nasdaq's during the dot-com bubble.

Exhibit 2: The Tech Bubble and the Silver Fad

Source: FactSet, as of 7/22/2015. Nasdaq Composite Price Index, 3/8/1996 - 3/10/2004. Silver prices, 4/21/2007 - 4/21/2015.

One slight difference is the Nasdaq fell a wee bit more than silver during the time period shown. From peak to trough, the Nasdaq fell by -78%. Silver -67%. Another is that the Nasdaq rebounded some starting at around the end of the period. Silver, as we type, is plumbing new post-bubble lows.

Now, who knows if silver bounces back from here and by how much. We are not in the commodities forecasting business. We can say this: Any rebound will be determined, like all commodity prices, by supply and demand. Presently, there are relatively few signs miners are materially slashing production. They eventually will. However, commodities have a tendency to bust for very long periods of time as miners take time to slow output. After all, silver's surge from 2008 through 2011 never reached its January 18, 1980 high, $49.45. (Exhibit 3)

Exhibit 3: Silver Prices, 12/31/1974 - 7/21/2015

Source: FactSet, as of 7/22/2015. 12/31/1974 - 7/21/2015.

While there were boomlets along the way, the chart above illustrates well that commodities like silver (and gold) aren't good long-term investments. They have no profits. No adaptability. No diversity. No innovation. They are not a hedge or a safety blanket. Those are the takeaways here.

Sadly, the lesson here likely comes far too late to help some. Many investors attracted to commodities like gold and silver in the bubble days thought they were getting a safe haven from what they saw as an unjustified rise in equities. The harsh, ironic truth is by incorrectly seeing stocks as frothy, silver buyers bought into a bubble of dot-com proportions.

^[i] This video turned out to be very wrong, on pretty much every front. Most notably that America didn't end.