Howard R. Gold
RTGAM



I was just starting to work on a column about silver mania Tuesday morning, when a big, beautifully produced ad insert-on silver, of all things-arrived with my Financial Times.

Proclaiming that "silver is the single greatest profit opportunity of our time," the insert featured a huge, nearly three-dimensional replica of a one-ounce U.S. silver eagle, with Liberty herself reaching out her hand and In God We Trust right there for all to see.

The coin replica, some 3 1/2 inches in diameter, shone like a harvest moon, glittering with the possibility of instant riches.

And-you just can't make this stuff up-it came just a day after silver prices hit their highest level in three decades.

On Monday, silver closed near $50 (U.S.) an ounce, just below where it stood when the Hunt brothers tried to corner the market back in 1980 (although it's way below that record when prices are adjusted for inflation). Silver briefly set a new high Thursday.

Of course it was a coincidence-the ad, by a Minneapolis coin dealer, was three months in the making, I was told-but it perfectly captured the moment when silver moved into the full-fledged mania stage.

The Fever Spreads

It's happened with lightning speed. Last summer, before the most recent market rally began after Federal Reserve chairman Ben Bernanke announced a new round of quantitative easing (QE2), silver was still gold's poor cousin, trading below $20 an ounce.

Since then, it has rocketed more than 150 per cent, and soared 50 per cent in 2011 alone. Gold, meanwhile, has plodded along with the stodgy old S&P 500 index this year-though it's up nicely from last year's lows, too.

In recent weeks, silver fever has reached, well, fever pitch. Silver prices have shot up nearly 20 per cent in April alone, as retail investors piled into the markets and the pros moved en masse into the futures and options pits.

Trading volume of silver futures at CME Group hit an amazing 319,205 contracts Monday-more than 50 per cent higher than its previous record last November. And this month, the contract's average daily volume has tripled from last year, The Wall Street Journal reported.

Both individual and professional investors have gone gaga for silver exchange-traded funds. On Monday, iShares Silver Trust saw three times the volume of the SPDR S&P 500 ETF, one of the market's biggest, and SLV's trading volume was five times its daily average in the first quarter.

And just to show how zany things have gotten, day traders have been piling big time into the ProShares UltraShort Silver , which makes doubly leveraged bets against silver prices.

How dumb is that? Well, on Wednesday afternoon, silver prices soared 7 per cent after Federal Reserve chairman Ben Bernanke told his first live press conference that he doesn't expect to raise interest rates soon, and that he'd like to see a little more inflation than the official figures are measuring now.

The ultrashort silver ETF plummeted 12 per cent on that day.

One seasoned trader told The Journal that day traders "are going crazy."

"It's typical of the bubbly speculation that's been going on in silver," he added.

Imminent Correction?

That's why one long-time commodity bull, Eric Roseman, thinks a big correction in silver-and other commodities-is imminent.

"We're long overdue for one," he told me. "Something is going to derail this."

"The summer is usually a very bad time to be invested in commodities and equities," explained Roseman, who is based in Montreal and edits the Commodity Trend Alert newsletter.

"They're all going to correct very sharply this summer," he said, referring also to industrial metals, like copper, which he said faces an inventory glut because of stockpiling by China, its biggest buyer.

He thinks silver especially is in a classic mania. I agree, and if you look at this chart put together by Jean-Paul Rodrique of Hofstra University, it's pretty obvious where silver is: solidly in the mania phase, right around greed, with the next stop being delusion.





Last fall, I wrote that gold was not in a bubble yet. Right now, it's somewhat behind silver, but has probably entered the mania phase of the bubble chart, too.

Remember, both metals have rallied for more than a decade: Gold hit lows of around $250 an ounce in 1999 and silver around $4 an ounce in 2001. So gold is up sixfold from its lows, while silver has risen more than 12 times. And the current gold/silver price ratio of 30:1 is "at an extreme," Roseman said.

One more troubling sign: While prices of the metal have soared, "the larger silver-mining stocks are starting to go down in the last couple of weeks, which is very bad. It shows exhaustion in the market," he said.

Roseman, incidentally, told me he started shorting some silver mining stocks a couple of weeks ago.

But as a self-described "hard money guy," he thinks silver will be a good buy again, after falling to as low as $30 an ounce in coming months. His ultimate target: around $125 an ounce.

The long-term case for precious metals and most commodities is intact, he argues. With the Fed still not ready to raise rates soon, the so-called "risk-on" trade will keep going. He also sees more inflation much sooner than Ben Bernanke does. And of course, the US dollar has continued to sink.

Pure, Dangerous Speculation

On the other hand, it's hard to see the same real-world factors driving silver's rise as we've seen with, say, oil and grains. Industrial demand for the metal has been steady, as has supply.

One table-pounding silver bull I heard on CNBC the other day was touting silver's use in solar energy panels. Oh, please.

Make no mistake: this is speculation pure and simple, and wild speculation at that. Some people may say they have "reasons" for buying now-inflation, the Fed, the dollar's decline-but you can hedge against all of those without buying silver.

No, the only real reason anyone's buying silver now is because they think the price is going up soon, and they don't want to miss the boat. That's the very definition of speculation, and it always ends very, very badly.

So, silver may keep rising for a few days or weeks, but then it will come crashing down quicker than you can unwind a call option on SLV. I agree with Roseman that we will find better buying opportunities down the road, but for now you'd best get your helmet and flak jacket ready.

Because in a mania like this, all that glitters is not silver.

Howard R. Gold is editor at large at MoneyShow.com and a columnist for MarketWatch. You can follow him on Twitter @howardrgold and read more commentary and watch his videos on http://www.howardrgold.com/">www.howardrgold.com.



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