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Hi Ho Silver...Away!

May 25, 2011 1:50 PM ET
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No, I'm not referring to the Lone Ranger and his trusty steed; I'm talking about where all the potential profits went last week for the precious metal silver.  Maybe a better opening would have been:  Silver: High, Low, Away!

After more than doubling in price over the past year and hitting a recent 31-year high of near $50, did people actually think it would continue its upward movement forever? It appears that most did not anticipate the precipitous drop to $32.30 per ounce or that prices could fall some 27% just since the beginning of May. The price even dropped a dizzying 12% in just eleven minutes after Asian markets opened a week ago Sunday Eastern U.S. time.  

It’s just the latest example of how a manic euphoria can scoop the hopeful masses up into a bubble of unrealistic dreams, a bubble that has an inevitable future—the big implosion.

But it’s not like I didn’t warn you. All the signs were there, all the same underpinnings that I laid out in my book,The Big Gamble: Are You Investing or Speculating? with its true tales of woe about how, throughout history, the uninitiated so-called “investors” have watched their so-called investments grow, peak, and collapse.

We should have learned from the dot com bubble, and most certainly we should have seen signs of the real estate bubble, and in this case, silver’s massive reversal had also been predicted well in advance. Yet when silver plunged, investors that hadn’t been paying attention were caught off guard, while heavily leveraged speculators were decimated.  

Of course they all could have easily avoided these devastating losses had they taken the time to do their homework.  Instead many got swept along and bought silver at the most-dangerous time possible, at its euphoric peak. True to form in the financial markets, the results of such willful ignorance are big fast losses.

Then when hedge fund high rollers like Soros reportedly dumped their silver holdings, it just triggered even more selling. Word on the street is that several other large hedge funds have also been liquidating commodity positions across the board over the past few weeks.

But even before Soros made the news, there were many with relatively miniscule holdings rushing to cash in their sterling silverware and heirloom silver tea services, their old jewelry and any other silver odds and ends, trying to beat the rush to the exit.  Many viewed the race to the pawnshops and antique dealers with amusement, brushing it off as the panic of the neophytes. They’re probably now wishing they had followed suit and rushed to their brokers.

What is the lesson here? Were you tempted to buy silver when you saw the prices heading up? Have you ever been tempted to buy anything just to get in on the ground floor?  Have you ever lost money because after you got in on the ground floor you didn’t know what to do next? 

The next big thing is getting ready to come down the pike right now. It’s heading your way. What will you do? Will you mistake it for an “investment?”

Do you have a good understanding of how hedge funds, algorithmic trading, and everything else that is totally out of your control can move markets in a matter of minutes and affect your asset holdings?  Who will be looking out for you then? These matters are not to be trifled with.  Don’t just jump into the fray without understanding the risks. Know how to spot a bubble and learn how to make it work for you, if that’s what appeals to you.

As I write in my book, the word “investment” is a misnomer for “speculation.” All you are ever doing is speculating. We’d like to help you get a solid understanding of that concept.  If you pick up a copy of my book,The Big Gamble: Are You Investing or Speculating? you could ride off into the sunset feeling little wiser.


Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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