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Ben Davies - Silver Criticality, Why Silver Might Crash?

With downside action in the gold and silver markets today, Ben Davies weighs in with his latest commentary. In this piece exclusively for the King World News blog, Ben Davies, CEO of Hinde Capital gives KWN readers globally his thoughts on where we are right now in the silver market, as well as where we are headed longer-term.

Silver Criticality – Why Silver Might Crash?

By Ben Davies, CEO of Hinde Capital

May 2 (King World News) - In 2003 Didier Sornette published what was arguably a seminal piece of work, 'Why Stock Markets Crash? Critical Events in Complex Financial Systems.' It is a study of a complex system - financial markets. It draws from a wide range of disciplines, both natural and social sciences. Sornette has set out to disprove the theory that complex systems are not predictable and that to comprehend them you have to look at them in their entirety, not compartmentalised into their single components. It is a case of the sum is truly greater than the parts.

It was his work as a geophysicist that led him to understand that 'failures' in natural phenomena were observable and translatable empirically to the 'failures' that occur in financial markets. In 1991, whilst working on Arianne 4 and 5 space rockets, he realised that the rupturing of the composite materials, Kevlar-matrix and carbon-matrix that constituted the pressure tanks on the rockets, was a cooperative phenomenon. The 'ruptures' in the bonding structure of these materials, were analogous to financial crises. They were the 'ruptures' of the market.

For the purposes of this HindeSight Investor letter we were particularly interested in the study of the premonitory phases before a crash, in our case, applicable to silver. Have we been experiencing the endogenous formation of 'ruptures', that is, sudden transitions from a quiescent state to a crisis or catastrophic event? Such ruptures involve interactions between structures at many different scales.

We believe that the market has been exhibiting the precursory signatures of power law behaviour, and that the internet power law of participation phenomena has produced a point of criticality whereby we have seen the top in silver for this half of the year. We believe a real shake out is imminent, in the order of $15 dollars over 3 to 5 days.

We believe that physical and paper sellers have begun to undergo a serious transfer of risk. The market after many years of suppression has begun to rise to facilitate new physical supply in the form of scrap and moderate mining hedging.

The likely rate of positive return on our 'log-normal' indicators is not high here. We are in a statistical fat tail not applicable to our Gaussian curve, but the 'richness' is consistent with outliers for this 2000 to 2011 bull market thus far.

Perspective in markets is everything. The rate of acceleration is not consistent with the precursory signatures for a crash to end this market. It is, though, a mini-version of this. The big parabola is yet to come.

A period of sideways to down action in silver would be consistent with seasonality, and would not be inconsistent with past trajectories; although both these variables are merely a guide.

We are not experiencing an 'outlier' set up similar to 1980, yet:

Let's not forget how we arrived here. We need pause for thought, which will be much healthier for the market.

Source: Variant Perception

Japan Criticality

Source: Variant Perception

When we consistently see this type of fiscal monetisation, as in Japan, one realises that real-adjusted targets for silver of $142, admittedly an outlier price associated with precursory signatures before a crash, will be surpassed. This is because, in reality, as John William's Shadow Government Statistics points out, $485 silver is the real outlier high. That leaves a lot of price discovery in between, and after years of price controls we are seeing the swift correction to these controls.