What Does the Top of a Precious Metals Bull Market Mania Look Like Just Before the Bubble Bursts?

Silver and gold have been on a tear lately. For what it’s worth, I think that there’s a strong possibility that you ain’t seen nuthin yet.

The mythical perfect investor would buy at the bottom and sell at the top, not just a top within a long-cycle bull market that can have wild gyrations that give off false signals. And, ideally, the top of a manic bubble, not just a business cycle type top. But what does the top of a manic bubble look like?

In stocks, there was the margin-buying bubble top of 1929 right before the crash. None but the oldest people on earth lived through it, and they were children at the time. But those of us who are boomers lived through another bubble. Mark Twain never actually said “History never repeats itself but it rhymes”, but those who’ve attributed it to him were on to something.

Younger precious metals investors have never seen a true bubble in their sector, the last one of which was in 1979/1980. There were a lot of fundamental reasons for a rise in gold and silver at the time. The United States had gone off the gold standard (“temporarily” according to President Nixon). Some really nasty inflation followed (cause and effect? duh) and the Arab Oil Embargo of 1973 dramatically raised gasoline prices, with ripple effects across the entire economy.

All through the seventies, the price of gold zigzagged higher, with silver in tow. A classic long-lived bull move. Then during 1979, the brothers Nelson Bunker Hunt and William Herbert Hunt tried to corner the silver market and silver went from $11 per ounce in September 1979 to $50 an ounce in January 1980. It’s estimated that the Hunts came to control at least a quarter, and possibly a third, of the world’s supply of silver. But they had done much of that on margin. When in January of 1980 the COMEX changed the rules for margin trading, the Hunts were not able to come up with the cash needed to cover margin calls. Then the bubble burst. Silver prices dropped below $11 within two months.

That’s the Cliffs Notes version of the bubble, but I lived through it so have memories of what it felt like at the time. The metals bubble then was a classic full-blown mania (gold and silver’s mini-spike of 2011 pales in comparison). If there’s another metals bubble in our future, the past offers some hints about what it might look like, particularly the environment right before the bubble bursts.

As an aside, for decades now there has been no true price discovery mechanism for the price of gold and silver. It’s been all about derivatives, mostly at the aforementioned COMEX and at the LBMA (London Bullion Market Association); people such as Ted Butler have chronicled collusion to suppress the prices of gold and silver by the big bullion banks such JP Morgan Chase, Goldman Sachs, and Société Générale. Butler was often dismissed as a conspiracy theorist, but Deutsche Bank’s recent admission that it had manipulated the price of silver suggests that where there’s smoke there’s fire.

Throughout 1979, gold and especially silver were in a bull market. By the late summer, it segued into a mania phase (not seen in 2011). There was talk of gold and silver everywhere. The day’s price moves were often the lead story on the evening news. Fly-by-night companies took out full-page ads in newspapers offering to buy everything from pre-1965 90% silver coins to dental gold. People did short-term rentals of commercial properties to set up businesses that bought silver and gold for cash. Long lines of customers waited to get in (I saw a line in Minneapolis that stretched two city blocks). Casual acquaintances offered stock tips on micro-junior exploration-stage mining companies. I had a coworker who quit his job to move to Idaho after cashing in his life savings to by a mining claim even though he had no background in geology, let alone prospecting or mining. All of this happened starting in late summer and then accelerated in the fall. By December it was bonkers, constantly front page news. FOMO gripped people.

When the bubble finally burst, denial was widespread. Normalcy bias blinded many people to the change in direction.

Even if an investor somehow managed to have perfect market timing and sell at the top, there’s always the question of What next? For the gold/silver top, moving into cash was an end in itself. But given how screwed up in the world’s economy now, a precious metals blow-off top might well coincide with a fiat crisis. It might then be better to move into some other asset class, even if right now we have no way of knowing what that class might be. Crypto (although now might be a good time for that)? Productive farmland?

Disclaimer: This should not be construed as financial advice. I am not a registered financial advisor; I don’t even play one on TV. Do your own due diligence. Batteries not included. Objects may be larger than the appear in mirror. Some assembly required. Do not taunt Happy Fun Ball.

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