It all started on Sunday evening, when a dramatic international price collapse began when silver fell 12% in Asian markets, according to Barrons (Access). After reaching $48.35 last week on Friday, by Thursday it had fallen almost 30% to $34.95.

The price collapse accelerated on Thursday and, as of this writing (on Thursday evening), the price of silver is still falling in after hours trading, according to the Wall Street Journal (Access).

The collapse of silver has had a “contagion” effect on other commodities prices, according to CNBC. On Thursday, oil fell 9%, gold fell 2%, rice fell 5%, and soybeans and wheat feel 2-3%.

A survey of economists by Reuters indicates that many of them expect the plunge in commodity prices to continue. According to Shawn Hackett of Hackett Financial Advisors:

“I’ve been pretty bearish over the last several months due to the unrealistic chasing of commodities that has taken place.

My expectation is that ultimately from the highs that we’ve recently set to the lows that we will likely set, I am looking for a minimum of 20 percent down.

The inflation trade got super crowded. There were record-long speculative positions in all commodities, the TV was telling you how hyper-inflation was around the corner … they were all signs that markets were not going up based on fundamentals, but they were going up because money was chasing money.

All of a sudden, all of the top-money leaves the market, and then the market has to find what the fundamental value is based upon supply and demand.

Real demand is not supporting these prices and the speculators are getting out.

My view is that a correction is going to take at least 6 months.”

Danger to stock prices

The most relevant question for most people is whether the “contagion” is going to spread to stock prices.

The stock price bubble actually achieved something of a milestone in the past week: The Dow Jones Industrial Average actually rose above 200% of its long-term trend value for the first time since the Lehman collapse in September, 2008. So, for the first time since then, stocks are overpriced by a factor of more than 2. (See my Dow Jones historical page.) Stocks have been overpriced by this measure continuously since 1995.

Another way of looking at it is that the S&P 500 Price/Earnings ratio index is at 17.16, according to the Wall Street Journal. P/E ratios (also called valuations) have been above the historical average of 14 continuously since 1995, sometimes WAY above average. (See “4-Nov-10 News — Fed announces $600 billion quantitative easing.”)

So by applying the Law of Mean Reversion to either of these measures, we see that the market is overdue for a crash at least as far as the Dow 3000 level, and will stay there for many years.

Obviously, there’s no way to predict whether the current crash in silver prices, and the resultant selloff in other commodities, is going to be the trigger that leads to this panic and crash.

The selloff in silver isn’t the only ominous sign. The euro crisis worsens literally almost every day. It’s almost impossible to believe the bond yields (interest rates) for Greece, Ireland and Portugal — with Greece’s 2-year bond yield well above an incredible 20%. And let’s not forget that there could be a major Mideast crisis almost any day.

So all I’m going to do is warn my readers, as I’ve done on three or four occasions in the past, that we’re now at a particularly susceptible time, when a lot of factors appear to be converging in a dangerous way. You should take additional steps to protect yourself and your family for at least the next couple of months, until it becomes clear whether things are going to settle down again.