The Silver Reverse Bubble of 2012

By Paul Mladjenovic

NEW YORK ( Minyanville) -- In late 2008, when silver was massacred in the futures pit and saw its price fall from over $20 to under $10, I told my readers at that time that silver entered into a "reverse bubble." I know it sounds odd, but let me re-visit the concept.

As you know by now, a "bubble" is when an asset reaches an unsustainably high level due to artificially stimulated demand. In 2004, I wrote that housing was entering a historic bubble because government policies such as excessively (artificially) cheap credit inflated the price of real estate to nosebleed levels. The real estate mania was everywhere in 2004-2006 as buyers were going berserk.

At the time, I had done a seminar with my favorite real estate expert (David Corsi) entitled "Housing Bubble Profits" and detailed my bearish rationale for why I thought that housing was entering a dangerous phase and that real estate investors and speculators would get hammered. The bottom line is that when an asset (real estate, stocks, whatever) gets bid up to high levels artificially (a level way above its true market price), the next step will be a painful plunge.

More from Minyanville
Stop Blaming the Gold Standard for the Financial Crisis!
Apple to Bears: Drop Dead!
Sneaking Soda in a Water Cup Now a Felony

When I first wrote about the "reverse bubble" in silver, artificial selling pushed the price of silver below its true market price. For a brief moment toward the end of 2008, the price of silver on the futures market was actually lower than a silver miner's cost of mining it. The culprit was excessive shorting on the futures exchange by several large financial institutions. This excessive short selling in silver futures has been painstakingly documented for many years by one of the world's leading silver analysts, Ted Butler. I consider Ted Butler, David Morgan, and Jason Hommel to be the world's best silver analysts and I highly recommend their research for anyone serious about silver.

Whenever an asset's price is artificially pushed down below its true market price, the resulting move boomerangs to the upside sooner or later (usually sooner). This is essentially a "reverse bubble." What happened to silver?