Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19
The IPO Market Is Nowhere Near a Bubble - 9th Oct 19
US Stock Markets Trade Sideways – Waiting on News/Guidance  - 9th Oct 19
Amazon Selling Fake Hard Drives - 4tb WD Blue - How to Check Your Drive is Genuine  - 9th Oct 19
Whatever Happened to Philippines Debt Slavery?  - 9th Oct 19
Gold in the Negative Real Interest Rates Environment - 9th Oct 19
The Later United States Empire - 9th Oct 19
Gold It’s All About Real Interest Rates Not the US Dollar - 8th Oct 19
A Trump Impeachment Would Cause The Stock Market To Rally - 8th Oct 19
The Benefits of Applying for Online Loans - 8th Oct 19
Is There Life Left In Cannabis - 8th Oct 19
Yield Curve Inversion Current State - 7th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Lies, Damned Lies & the Gold and Silver Z-Score

Commodities / Gold and Silver 2011 May 13, 2011 - 01:17 PM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleIf only silver, gold and oil mapped the nice, neat bell curve which statistical analysis calls "standard distribution"...

WHAT ARE the chances? Things that just shouldn't be just keep happening.


  • Oil prices in July 2008 made the kind of year-on-year jump that basic statistics says should happen every six decades or so – only to make another such jump in April 2011;
  • By the standard of the previous three decades, iron ore prices made a one-in-775-billion jump in spring 2010;
  • Cotton futures went crazier still in the seven months to Feb. 2011, says Sean Corrigan at Diapason Commodities, making "a nearly 10-sigma move". That equates to a 1.523970*10^-23 shot.

"Perhaps something was changing in the asset world to have caused so many outliers in the last 35 years," wonders GMO asset management's Jeremy Grantham in his latest client letter.

Reviewing everything from the stock-market crash of 1974 to US housing's "first-ever nationwide bubble" thirty years later, "my [investing] career...has been filled with an unusual number of real outliers," Grantham concludes.

But perhaps, in a world cut free from all limits on the quantity of money, what used to look like unlikely, far-fetched "outliers" are becoming par for the course. Or perhaps the maths is just wonky.

"We were seeing things that were 25-standard deviation moves, several days in a row," claimed Goldman Sachs' chief financial officer David Viniar in August 2007. Yes, he was talking about losses, not bubbling gains. But he was also talking through his hat, at best.

"The probability of a 25-sigma event is comparable to the probability of winning the lottery 21 or 22 times in a row," found a paper for the Journal of Portfolio Management published the next spring. And events deemed that unlikely by your model either will not happen, or your model is junk.

Take silver (if you can get it) for instance. Silver prices showed an annual gain of 175% at late-April's peak. (Dark forces, you see, are working to suppress it.) That compares with an average year-on-year change, going back to Jan. 1969, of +11.9%. Divide the difference between those two numbers by the standard deviation in silver's year-on-year rate of change (don't glaze over, we're almost there) and you get what brown-corduroy beards on the BBC's Open University would call the "Z-score" – in late-April's case, a reading of 3.46.

The Z-score is counted in standard deviations – aka "sigma" – and anything above 2.0 sigma, according to people who make a living from such stuff, means you're looking at an outlier...a bubble perhaps. Because that kind of Z-score, at two standard deviations or more, marks the peak of Japan's 1989 equity bubble, the 1999 US tech-stock bubble, and the 2006 US housing bubble. (See the World Gold Council's excellent Bull Market in Perspective for more.)

A reading above 2.0 also shows up at silver's previous flirtation with $50 per ounce – squeezed into Bunker Hunt's corner of Jan. 1980 – plus six other brief periods of the last four decades, two of which peeped into the last 9 years' bull market, and one of which struck hard at the end of last month.

Note that the left axis, measuring the Z-score of silver's year-on-year price change, doesn't bother with low or negative readings, because we're only looking for bubbles.

Note also that it's shown on a log scale. Because when silver jumps, it really moves – so the Z-score doubles between each number on the axis.

Now, if the world mapped the nice, neat bell curve which statistical analysis calls "standard distribution", then a Z-Score of 2.0-plus would account for fewer than 1-in-20 of all prices moves. For silver, however, a reading of 2.0 or more shows on fewer than 1-in-38 of all trading days since Jan. 1969. April's peak of 3.46 was rarer than 1-in-a-hundred. And to date, all such "outlier" moves have all ended badly in silver.

The average 1-year return for anyone buying silver at a Z-score of 2.0 or more has been – wait for it – minus 18.3%. Just saying. And just so you know, that compares with an average gain on gold, if bought at a "bubble-top" Z-score of 2.0 or more, of over 11%.

Five times in the last 42 years, the gold price in Dollars has risen so fast that its year-on-year gain has exceeded two or more times the standard deviation of all those daily year-on-year changes. Only two of those "bubble outliers" then blew up, however, and two of them (1975-6 and then May 2006) marked a mere hiatus before gold prices rose once again (8-fold and near-tripling respectively).

On a daily basis, breaching the 2-sigma level is less of a rarity for gold than silver – barely rarer than "normal distribution" would imply, in fact, with a near 1-in-20 frequency across all trading days in the last 42 years. And like we just saw, the curse of two sigmas has so far rewarded new gold buyers with 11% gains one year later on average – a post-bubble return that must taste like powdered unicorn's horn to Nikkei stockholders, tech-stock traders and Florida flippers.

Still, what's all this historical, statistical rubbish worth if you're out 25% in silver or 5% in gold today? Less than a $50 call on June silver, perhaps. But bubbles are about speed, not longevity. And in the 21st century so far, the prices of gold and silver have enjoyed plenty of both, along with pretty much all other natural resources.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules