Real Silver Highs

Thanks to its awesome autumn rally, silver has become something of a rock star in the commodities world. Investors and speculators alike are enthralled with this white metal. But with it just hitting new 30-year highs, many on Wall Street suspect silver is stretching to bull-ending extremes. However once silver’s modern history is recast into real inflation-adjusted terms, this metal’s secular bull is still looking young.

For any long-term price comparisons, over a decade, adjusting for inflation is absolutely essential. The US Federal Reserve is constantly creating new fiat dollars out of thin air, cheapening all the other ones already in existence. When the money supply grows faster than the pool of goods, services, and investments on which to spend it, nominal prices rise. Relatively more dollars compete for relatively fewer things to buy, driving up prices.

You may be old enough to remember 1980, the end of silver’s last secular bull. Back when silver hit its all-time nominal (not inflation-adjusted) high of $48 per ounce, the US median household income was under $18k. Across the nation, new houses averaged just $76k while new cars ran less than $6k! A candy bar went for a quarter. Obviously a dollar back then went a lot farther than a dollar today. The Fed’s inflation since has relentlessly eroded each dollar’s real (inflation-adjusted) purchasing power.

So comparing $30 silver today to $48 silver in January 1980 is grossly misleading, it isn’t even close to being an apples-to-apples comparison. We have to adjust past prices for inflation in order to see them rendered in today’s dollars, which are the only dollars we really understand. The purest way to do this is to adjust past prices for growth in the Fed’s money supply, minus real economic growth. If money ramps by 8% and the US economy grows by 3% in any given year, then actual inflation is probably close to 5%. (more)