 The S.M.A.R.T.
Silver Equation
By Rock Gale,
Ottawa, Canada
September 23, 2004
I started writing and investing in silver more than two years
ago when the Price Of Silver (POS) was $4.50/oz. In one story,
I flogged that tired old rocket metaphor yet again. Why does
it seem to get used so often? Is it really an
appropriate analogy? And if so, I wonder if I can plot its trajectory.
I must warn non-technical readers that this article may cause
extreme drowsiness, which could possibly lead to narcolepsy.
If Silver really is like a
rocket it should obey Newton's Laws. How can I test Silver's
adherence to the Law's of Motion? Well, being socially challenged,
I find that I have a couple of extra hours... Let me see. If
Silver acts like a rocket, then the trajectory of its price curve
should fit a Newtonian Equation. Oh my god! I am a True Nerd!
This should be easy.
Most of us, in high school,
studied Physics. I remember that it was like being hit with some
super-secret government nerve gas. Just mention Newton's Laws
and the class was asleep instantly, but the theory as I remember,
was quite simple, and could have been interesting if they'd given
us all motorcycles to ride. Because a crotch-rocket is a great
way to learn about acceleration! A true rocket must, I think,
have gobs of measurable acceleration.
It's very easy to wave your
hands in the air while looking at Silver fundamentals and point
to the moving averages and upwardly sloping support lines on
the Silver charts, while loudly proclaiming that Silver has acceleration,
and so thusly QED, with a bow and a flourish, we have proven
that Silver is a Rocket-like thing. But I'm not a silver-tongued
CEO, or a Federal Reserve Chairman, or even a minor politician.
I'm an engineer. I deal in facts and logic, not lies and deception.
I should be able to provide numbers to support this hand-waving
and tongue-wagging. I would like to demonstrate mathematically,
that Silver is one of the fastest moving investments in the universe
and still gaining velocity.
It would help my explanation,
if we had an idea of what that high-school Newtonian Equation
(NE) was really all about. Well, let me just shift my huge, and
90% under-utilized Nerd Brain into second gear... the NE is all
about existential and relativistic, determination of time and
spatially distributed vector coordinates. Isn't it? More simply,
an equation can tell an object's Position over any given Time.
A Mathie would say that Position is a function of Time, or P
= F(T). The "Function" is just a whole bunch of things
that we already know or can measure.
POSITION
The first thing we need is
an Initial Position. Newton said, "An object at rest tends
to stay at rest, (unless acted upon by an external force)."
Remember that? Everything has a position. We can measure an object's
position many ways. We measure a rocket's altitude in meters
above the earth. We measure Silver in terms of US dollars required
to buy an ounce. Most people think that the Bull Market in Silver
started at its lowest $ position a little over two years ago,
and maybe that's true by definition of a Bull Market; however,
the Silver Rocket actually started long before that. Trust me,
you'll see why in a bit.
Five years ago, Silver traded
at around $5.20 US, when Gold was a "barbarous relic"
and Fort Knox may still have actually contained a few ounces
of Precious Metals, instead of all those gray-green, cardboard
storage boxes full of little pink IOUs. Let's assume for now,
that $5.20, five years back, is an approximate initial position.
What else does a Newtonian function use? Oh yeah...
VELOCITY
Five years ago, the Silver
Rocket - no one called it that back then - was falling out of
the sky. If it was a rocket, it had a bad thruster problem. It
had big-time negative Velocity. It had fallen from the 1998 highs
around $8.00 and hadn't yet hit bottom. It took another two years
and seven months, to finally reach its average monthly low of
$4.17. At this point, the POS velocity was zero. The Silver Chart
at this point was gong sideways, and silver was going nowhere
fast. Think about that though... from its negative initial velocity,
some force must have been acting on the POS to slow down its
decent. And here's the start of the interesting bit... when the
POS hit the bottom, it was already Accelerating - in the Newtonian
sense. The velocity of Silver started changing positively (less
negatively), as the POS was still falling in 1998-1999. Yes,
more than five years ago as the Silver Rocket was plunging to
earth, the big jets first ignited.
ACCELERATION
Acceleration is simply a change
in velocity. It can be easily measured. Remember the equation
F=MA? That equation, Force = Mass times Acceleration, really
just means that when you apply a constant force to a moveable
object - anything at all - the object changes it's velocity proportionally
to the force exerted. It accelerates. It's velocity changes and
changes and changes, faster and faster... until you remove the
Force. That's what happens when you turn on the jets of a Rocket.
The force of the burning fuel causes acceleration. That's what
happened to Silver more than 5 years ago as it was plunging to
earth. A positive force was applied - for now, let's call it
the SMART Force. That force has not only continued to this day,
but as we will see, the SMART Force has been continually increasing
over the last 5 years!. Yes, Silver's velocity AND acceleration
are both still increasing! Like a Rocket, fighting against the
earth's gravity. The higher it flies, the less is the pull of
gravity, and the smaller becomes the drag of friction. Acceleration
- the change in Silver Price Velocity - increases.
It all boils down to a single
Newonian Function. I call this is the SMART Silver Equation.
Assume that the price Position
of Silver, like the vertical height of a rocket above the earth,
can be expressed by an equation. The position P in any month
(m) would depend upon five factors:
1. The initial position (I).
2. The initial velocity (V).
3. The acceleration (A).
4. The change in acceleration (Q).
5. The time which I express in months (m).
My Newtonian equation looks
like this, (my apologies to Isaac):
P = I + (V * m) + (A * m * m) + (Q * m * m * m).
Now I put all the monthly Silver
Prices for the last 5 years into a file and write a simple program
which reads the Silver price file and finds the best values of
I, V, A, and Q that make the equation come closest to the real
averaged monthly Silver values. This is called the "Least
Squares Regression Analysis." It's a tricky bit of Black
Art in some places, and there is a certain amount of engineering
poetic license involved, for example in choosing methods of averaging
and some of the program parameters, but I guarantee that I've
been more honest than any government accountant you ever met.
And after the program is written, I just bung in the data, click
the mouse and Bob's-your-Uncle... out comes the numbers! This
is the Silver Equation that my program comes up with:
I = $5.20 - This is the initial Silver price my
program calculated about 60 months ago, based on averaged monthly
Kitco silver data I downloaded.
V = minus $0.052 per month - This is Silver's
initial price Velocity at Time=0. The minus sign says that the
price was moving down initially, at an approximate average rate
of 5.2 cents per month - a rocket, or NASA's newest satellite,
falling from the sky.
A = $.000000014 per month per month - An initial
SMART Force is acting to push the price positively and is changing
the velocity by this rate every month. This is a very, very,
very small initial acceleration, but every forest-fire starts
with a single spark! It's true that small number gets multiplied
by the square of the number-of-months, and so the velocity begins
to change more quickly as the month (m) increases, but even with
that, this number is too puny to be important. It's the next
one that rocks!
Q = $0.000029 per month per month per month -
This is it! The SMART Acceleration may start tiny, but it's increasing
at a rate that is four orders of magnitude (powers of ten) larger
than the initial acceleration. The acceleration is changing by
this rate every month. Thus, the $ velocity changes faster and
faster every month. This Q number is multiplied by the cube of
the number-of-months parameter (m), so it increases very fast
indeed!
This is what it looks like
on a graph. Notice that at first the velocity changes very slowly,
but it soon begins to pick up more and more acceleration. The
Force is growing stronger and stronger month by month.
The "best fit curve"
clearly shows that Silver is following the SMART trajectory that
it started 5 years ago! The curve predicts that the POS will
double in less than two years - if it stays upon the path. Aren't
cold, hard facts interesting!
But here's the kicker. And
here's where I have to get all hand-wavy and opinionated again.
Do I think it will stay on the path? It might but my belief is
"NO," I don't think it can stay upon this path. WHAT!!!
Sorry, but this curve extrapolation is probably just an exercise
in futility like much of life. The conclusion I draw, from the
data, and from what I'm reading, is that the curve can't possibly
continue that long.
The chart can only show graphically
that there is and has been an ever-increasing, SMART Force driving
the POS. The problem with curves like this is that past performance
can never fully predict the future. We need logic and experience
to assess the outcome. Unfortunately, we don't have much of that,
but I do have a few mystical thoughts.
1. The SMART Force will continue
to increase until there is a severe physical Silver shortage,
and the POS will then increase dramatically. Start with a small,
dwindling Supply. Subtract a constantly growing Industrial Demand,
(which already exceeds the Supply), then from this you subtract
an ever accelerating amount of Investment Demand. Guess what?
Eventually, you run out. Duh!
2. I think that anyone who
says that an upward spike in the silver price today, will reverse
and be over just as quickly as it was in the early 80's is being
grossly illogical. There are no stockpiles left to sell as there
were in the 80's! These accelerating forces of Silver accumulation
will not subside until the price drives new exploration, discovery,
and renewed supply. When there is a shortage of supply, people
tend to build stockpiles which will further support prices. Stockpiles
won't be rebuilt quickly. Perhaps towards the end of the next
decade!
3. I think that people who
refuse to consider that any kind of conspiracies could exist
whatsoever, and dismiss such with a casual, condescending wink
and a trivial turn of phrase, must have slept through 9/11, the
second World War, the Russian, American and French revolutions,
athlete doping, and Enron, not to mention a thousand government
coups, the Rothschild fortune, and the takeover of American Justice,
Dollar, Freedom and Democracy by the Banks, Big Business, and
Big Media. Conspiracies not only exist. They are the norm, wherever
and whenever meetings happen behind closed doors. Otherwise,
the doors would be open. The difference between wealthy and poor
is that the wealthy can keep a secret.
4. I think it doesn't take,
as some suggest, a huge wave of speculation by the general populace
to bid up the Silver market to the breaking point. It only takes
a very small percentage of savvy investors with some free cash,
trying to escape the wealth-destroying monster of Inflation.
I suspect that there are more than enough SMART investors with
cash, judging by the huge amounts of insider stock market selling
we have seen over the past year by rich North American executives.
The cash proceeds of these insider stock sales have produced
many times the necessary funds to power Silver and Gold as well.
I suspect many wealthy investors are at this very moment, waiting
for the "signal" or are already quietly accumulating.
Perhaps the "signal" will happen when the USD index
crosses below its 200 day moving average!
5. At these artificially low
Silver prices, created by 30 years selling off precious above-ground
stockpiles, and closing down mines, it takes so little money
to buy the remaining above-ground supplies of silver, that a
single large investor could in fact do it tomorrow afternoon,
and still have enough left over to buy Air Canada - though why
anyone would want AC, I can't imagine. The total current COMEX
warehouse Silver stocks - which have incidentally fallen dramatically
over the last two months - could all be purchased for around
a billion dollars Canadian! (if all those ounces were available
for sale). What would happen to our rocket ship then? Warp 9,
Captain? The di-lithium crystals canna take much more!
6. The SMART Force is evidenced
by heavy attendance at Precious Metals conferences, the myriad
fully subscribed junior mining ventures, and the recent PM purchases
by many of the world's well-known, elite investors.
Final Destination?
Silver has been used as money
for thousands of years. So have Copper, Gold, and Tulip bulbs.
The world will pick as money, any of those things which are -
if only for the moment - most rare and most valuable. If Tulip
bulbs could command a price higher than Gold, then why could
not Silver? Silver is after all, even more rare than gold at
this particular moment in time, and soon might be more hard to
buy than tulip bulbs were in their glory days. There is an awful
lot of Gold in bullion warehouses, which can be brought to market
if the price increases significantly. This is not true of silver.
When the Hunts tried to corner the market in the 80s, what were
they thinking? There were billions of ounces of silver above
ground available to be sold. You can't corner the grain market
when there are silos full of it.
Today however, no matter how
high the Silver Rocket flies, there will continue to be a dwindling
above ground supply of Silver for years to come. No doubt the
price will overshoot the steady-state "fair' price by quite
a bit, but you will not see these current price levels in Silver
ever again.
In 3500 BC, silver was comparatively
rare with respect to gold. With continued Silver investment,
increased industrial use, hoarding, mine depletion, and finally
rebuilding of private and national stockpiles, it is not a huge
stretch of my imagination to envisage the ancient Gold-Silver
ratio again - at three or less!
Remember, Newton's First Law,
"An object in motion tends to stay in motion."
Rock on!
September 20, 2004
Rock Gale
Ottawa, Canada
email: rockgale@yahoo.ca
Rock Gale Archives
Copyright ©2002-2006 Rock
Gale. All Rights Reserved.
PS: I currently own Silver
bullion, as well as Silver and Gold shares. Do not believe anything
I say. I am highly biased, easily swayed, and many have said,
legally insane.
321gold Inc
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