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May 10, 2006

The Great Silver Spike of 1980
by Roland Watson

We are getting excited about the things that lie ahead of us. Before us is a rising slope heading off to a barely perceptible mountain top that is shrouded in the mist of a new dawn. It rises imposingly above us yet its height remains uncertain due to our inexperience and uncertain memories of a prior peak. Many speak of that last ascent, but few had personally ascended it, save a few veteran mountaineers.

What can we say of it now, a mountain that is far behind us yet still standing out majestically in the distance against the foreground of lesser peaks and hills? It is the mountain against which all other silver peaks are measured. It is the Silver Peak of 1980.

On that fateful Monday of the 21st January 1980, Silver Peak ascended to the dizzying heights of $130 as measured in 2006 dollars. How do we come by that "height"? According to the Bureau of Labor Statistics, the Consumer Price Index for all urban consumers was 77.8 in January 1980. In March 2006, it was 199.8.

Also, there is the matter of how high that grand silver peak actually ascended to. Various numbers gravitate around $50 give or take a dollar or two. According to Paul Sarnoff's book "Silver Bulls", January silver contracts topped out at $49 with a low of $37 and a close of $44. However, Stephen Fay's work "The Great Silver Bubble", suggests that it went as high as $50.50 on the COMEX exchange but goes on to state that the record was actually set three days earlier on the CBOT exchanges where it topped out at $52.50. For historical purposes we go with the $50.50 on that notable Monday afternoon.

I guess the peak is always that harder to discern when the wild snowstorms of the naked short sellers are suddenly blowing through the freezing are. One thing you do not want to be is naked at the top of a mountain.

The chart below shows the Silver Peak in all its glory. It has a certain symmetry about it as well as the crags and steep falls that we associate with the hazardous enterprise of commodity mountaineering. In fact, and sad to report, there were indeed fatalities as investors tumbled down this sheer precipice thinking that they were well-equipped for such a steep gradient. Some lived to tell the tale but others have become rather scathing in their regard to any silver rock climbing.

But now we have a new mountain and a new set of climbers. At a height of $14, we have barely left base camp as far as the old heights of $130 are concerned. In fact, one could say we have barely started at all. We have this new mountain before us, but we have no clue how high it really is or what kind of incline we are going to encounter. One also wonders how many obstacles and boulders will block our way. But for now, we are striding up the relatively gentle slopes but some are already beginning to get fatigued and are taking their mountaineering profits. We think they are premature in their capitulation.

In fact, reversing our CPI numbers, a silver height of $14 today translates to about $5.50 in 1980 dollars. That happened to be silver's price on the 19th January 1979 and way to the left and beyond on our Silver Peak map. Can Son of Peak Silver really ascend such fantastic heights? How high can it go before the other side of the mountain range is revealed to us? Will a sheer drop await more investors at the other side, or will the ascent be that more gentle with the occasional plateau upon the way?

We can hazard some guesses but one thing is sure, you can either go up the mountain to achieve the zenith of mountainous profits or you can get in your low risk car and drive around it. The choice is yours.

Roland Watson is the author of the "Silver Spike Report" which analyses the technical and fundamental data from 1979 to 1980 to look for lessons that may help exit strategies if another jagged peak is upon us. This report can be purchased by visiting the blog site www.newerainvestor.com.

He also writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. To view a sample copy of the newsletter, please go to www.newerainvestor.com and click on the "View Sample Issue Here" link to the right.

Comments are invited by emailing the author at newerainvestor@yahoo.co.uk.

Roland Watson
http://silveranalyst.blogspot.com

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