I wanted to find out what the relationship was between inflation and silver prices. I took 2001-2010 CPI information from the Bureau of Labor Statistics, and the historical price chart of silver prices in London. The CPI used was the average of prices by year, the price of silver used was the average of prices in January: 2001 177.1 4.66 2002 179.9 4.51 2003 184.0 4.81 2004 188.9 6.30 2005 195.3 6.61 2006 201.6 9.15 2007 207.342 12.84 2008 215.303 15.96 2009 215.537 11.29 2010 218.056 17.79 The pearson correlation coefficient: 0.932954. This was an extremely high correlation. One cannot make a causal claim since this is a correlation, but I think it is reasonable to assume that the prices of silver is mostly driven by inflation.
Now if I took more data into account, this would probably decrease the correlation, given the volatility of the price of silver. So the correlation wouldn't be as strong, but I still predict a moderate to strong correlation suggesting that the price of silver is mostly being affected by inflation.
it's probably a general commodities thing. http://www.traderdannorcini.blogspot.com.au/2012/11/silver-and-risk-trade.html
Your correlation is excellent for the precious metals bull market that began in 2001. You could do the same analysis for the previous bull market from 1970 to January 1980, and you would find a similar correlation. If you expand your horizon to look at the bear market of 1980 to 2001, however, you would see a very negative correlation because inflation increased each year, but precious metals prices dropped consistently during that bear market. To get a true picture of the driving force on precious metals, you need to also consider interest rates. That may seem confusing at first because nominal interest rates were high during the 1970s bull market, and high during the 1980s bear market, but are obviously low during the current bull. If you look more closely, you will see that real interest rates (defined as T-Bill rate minus the true rate of inflation) are not only very well correlated with the performance of precious metals, but are the actual cause of the bull and bear markets since 1970. There is more detail about this in Real Interest Rates Control Gold and Silver at http://sitekreator.com/Optimist/cpi-tbill.html. My conclusion is that the current bull market in silver and gold will continue until the FED raises nominal interest rates to higher than the true rate of inflation (just as the FED did in 1980). Some of us argue that the massive debt Ponzi scheme makes it impossible to raise interest rates significantly, so the current bull market for silver and gold will continue until the wheels fall off the economic cart. YMMV so DYODD. Cheers!
Upto 2008 the price trend of silver was caused by people taking into account the price increasings then. Since 2008, the price trend was caused by people taking into account possible price inflation, based on "Quantitative Easing" Federal Reserve operations. So far, 4 years later, about 20% of the QE dollars added to the amount circulating money. If 100% translating into higher prices (what can be assumed since a crisis means a run into limitations to produce more at the same cost), it would mean that the silver price of 2008 should increase the same 40% as the narrow monetary base of the dollar minus its current excess reserves. A panic based 2008 bottom silver price would translate to $14. A 2008 average silver price would translate to $18. A 2008 peak price would translate to $31. Sources: https://research.stlouisfed.org/fred2/graph/?graph_id=61874&category_id=0 https://research.stlouisfed.org/fred2/graph/?graph_id=98775&category_id=0 http://finviz.com/futures_charts.ashx?t=SI&p=w1 My opinion is that the 'bull market' of silver will only continue when we see general prices going up enough first, in similar degrees to silvers since 2008. Only then profit in terms of purchasing power will vanish, and stop the profit sales that now everytime dump silvers price to where it came from, and thus give an opportunity to buy back in lower. In the meantime of this general prices uptrend, people that buy silver at todays levels, will thus in terms of purchasing power actually lose. That is the 'hard time' that recent silver buyers have to bit through. At some point, they will get into the same position as those that bought in the middle of the panic of 2008. But apparently, the amount that does hold, shrinks. Instead, they sell. This summer even at $26-27. The silver market won't improve much as long as this bad trading behaviour continues. That's why I like to tell people to not pay the higher prices that were driven up by the futures market systemical and money for nothing-searching entities. Without a general price inflation catching up with silvers speculative earlier move, its bound to end up in seeing much cheaper prices AFTER you bought. And that is the worst advertisement of silver. We don't need those to the moon predictions, we need people buying silver and see green instead of red. Then they stay, instead of leave, back to fiat, 'desert' to gold / whatever else.
Very interesting data and perspective. I agree, you can't infer causation from correlation, but the fact that they're so highly correlated is a good indicator that the more inflation we get, the high silver prices will go. Here's another interesting perspective on this topic. It's a prediction of $100 silver prices based on projecting the national debt numbers out into the future. We can see in the past they have been somewhat correlated, so if we continue on the same path into the future $100 is very likely. [youtube]http://www.youtube.com/watch?v=2i_2Ulod08Q[/youtube]
There is a good recent example of an inflation trend: Belarus. http://www.bullion-rates.com/silver/BYR/Year-5-chart.htm Compare the time line progress with the price increasings progress. The origin of this trend is a government currency devaluation. A devaluation can be seen as the instant and very visible version of X years more disguised inflation. If we project the Belarus story to a worldwide scenario, there is a major difference: Belarus has alternatives that are better, the worldwide scenario lacks them. Without alternatives, bad currencies (or bad anything) can 'survive' longer. And that in turn means that the final run into economical limits (ability to produce more at same cost), would bring about a price inflation trend with the shape of a massive upleg. The most likely moment for its birth is an apparent economical recovery. When spending rates seem to reach again pre 2008 levels. The mentioned lack of better alternatives would then imply the famous 'run' on the 'real' stuff. In other words: the collapse of the derivatives cloud and the subsequent refusal of fiat currencies. Likely the central planning will attempt to introduce a world currency then, and use the transformation process to insert a devaluation round similar to Belarus' one. Whether they will succeed or not, will depend on the control on the economy they have built up by then. If they succeed, we'll get the full Depression, if they don't, we'll get an ugly but short period, were the central planners are routed out and recovery can begin.
I think silver will go down in the near future... It's already too high. I see gold correcting and due to the low industrial production across the World, the industrial usage of silver will be lower than many have been predicting. I think it will go below 30 $. It might reach 50-60 $, later 100 $ or more, but I think that we shouldn't expect that to happen too soon. Lower GDP's reported across the World, including China, means: lower demand for silver. I think we will have a downward slope and the uproar will happen when the euro/dollar and other currencies start heading downwards...
Up or down, I still intend to stack. If I buy 100oz today at $33/oz, I have a FIAT evaluation of $3300 (easy math!). Now, if the price drops to $25/oz, my new valuation is $2500. Yes, we all know this, but I see this as a minor loss and something that can correct over time. I can still liquidate if needed and I think it's less risky than stocks. I could stick my money in a bank. I just checked, Chase will offer me .05 for my hypothetical $3300. You know what that is in interest a year? $1.65 WOO HOO! I'll buy silver and wait, as I can afford to do so. Might buy high, might buy low. In all honestly, I try desperately to buy in the dips when I am ready to buy. But if I'm only buying 20 oz at a time, if I get lucky and time a 50 cent dip correctly, I really only saved myself a lunch out, it's not worth stressing about (tho it's 6x more than the bank will give me for looking at my money...) If I can quote the Hitchhikers Guide: In fact there are three freely convertible currencies in the Galaxy, but none of them count. The Altairian Dollar has recently collapsed, the Flanian Pobble bead is only exchangeable for other Flanian Pobble Beads, and the Triganic Pu has its own very special problems. Its exchange rate of eight Ningis to one Pu is simple enough, but since a Ningi is a rubber coin six thousand eight hundred miles along each side, no one has ever collected enough to own one Pu. Ningis are not negotiable currency, because the Galactibanks refuse to deal in fiddling small change. From this basic premise it is very simple to prove that the Galactibanks are also the product of a deranged imagination.
