Silver corrected sharply today. For the day, it was down over -13% at its lows intraday before ending the session down -10%. But today’s outcome was not necessarily a surprise. After rising over +160% since last August, silver has been in a full-blown mania. Such manias are accompanied by increasingly volatility and usually end badly. Recognizing these extreme risks in advance, all silver positions were sold last Friday, April 27. The sale price was $47.87, which was near the recent price peak for silver and +12% above today’s close.
The underlying fundamental story behind owning silver - hard asset protection against aggressive monetary stimulus, inflation and currency debasement - remains in tact. But the decision to sell silver last Friday was driven by several factors.
First, speculative activity in silver is becoming increasingly frothy. Silver is a relatively small segment of the precious metals space and trading volume is typical a tiny fraction of what is seen in the broader stock market. So when the trading volume of the iShares Silver Trust (SLV) exceeded that of the SPDR S&P 500 (SPY) last Wednesday with nearly 50% of all outstanding shares changing hands, this reconfirmed growing signs that far more that just fundamental investor conviction is at work in the silver market right now.
Second, after skyrocketing since last summer, silver had reached a critical resistance level in the $50 range. This was the previous high from all the way back in 1980. Silver made a run at $50 three times last week on Monday, Thursday and Friday and failed to break through this level in each instance. This indicated that selling pressure was strong at $50 and would ultimately lead to a price pullback, as recent speculative entrants into the silver market eventually opt to exit the trade while the more aggressive speculators start to descend on silver with their bets that the price is going down.
Price swings are also becoming more violent. Last Tuesday, silver plunged over -4% on options expiration. The next day, it soared +7% following Bernanke’s speech. And today it plunged -10%. Such massive price swings are characteristic of what’s often seen at the ending stages of a mania, and the subsequent downside is typically sudden and sharp.
Finally, some qualitative indicators were also setting off alarms. For example, silver is typically an investment that flies below the radar. The mention of silver once a week on the mainstream business television channels would be a lot in a normal environment. But in recent weeks, silver has been getting daily headline coverage on the major networks. Such attention historically indicates that speculative buying activity is close to exhaustion, as the final marginal buyers are drawn into the market and selling demand begins to overwhelm buying demand.
While silver could continue to rise higher from here, risks are overwhelmingly to the downside from recent price peaks. Now that the silver position has been exited, I will continue to monitor the market for any potential reentry points. This will be unlikely in the near-term, at least until the speculative froth has been worked off, and any future positions would likely have a small allocation relative to past positions. Instead, other asset classes currently offer better opportunities. This includes gold, which has been behaving much more rationally with a much more predictable trading pattern.
