Saefong: Silver Mania

Myra Saefong has a Marketwatch article (link) entitled "Silver Mania may come to an abrupt end." A few quotes from the article:
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Peter Grandich, a self-proclaimed former “raging bull” on silver from under the $10 level, is saying “sell all silver holdings.” ...

[Karnani] "...silver prices can crash to $25 next year."

Jeb Handwerger, editor of GoldStockTrades.com, in recent newsletters. “I am very concerned that silver may be overheating as the herd tries to force their way into this trade.”

[Ned Schmidt] “Silver is the ‘internet stocks’ of 2011”

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With some long time permabulls in the group or chirping birds, it seems unlikely that silver will cooperate with a crash. To me, a more likely scenario is that silver forms a new base from $40 to $50 and spends some time in a trading range.

Let me add some more perspective. For many years, I've advocated dollar cost averaging into silver and gold for long term investors. This is no longer the case. With a possible bubble forming, DCA might be about the worst strategy to start now. It might be okay to continue, if a person has a big stack at lower prices. In a bubble, the rise is short and steep and the down trend long and relentless. DCA will put way too much money into buying during a long downtrend.

In contrast to silver, the gold chart still looks supportive. So for the investor with significant net worth and zero metals holdings, it still makes sense to buy a little and have some as insurance. To tilt heavily into the hot sector after having zero exposure is always a recipe for danger.

So what kinds of strategies make sense in a bubble? Not very many for long term stackers. Selling a bit with each price increase and reallocating into other asset classes is the rational plan. That presupposes that a person has a large allocation now and bought at much lower levels. Advanced option strategies such as vertical call spreads or put calendar spreads may work.

As always, we won't know if silver is a bubble until we see more price history. However, birds don't typically chirp such loud warnings at market tops. So if I had to vote, I would vote "no, not yet." With that, for a person with no holdings, better to steer clear, than to jump in to what is likely to be fast moving water.