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How to Ride the Silver Bubble

Fin - Breakout - US

If you're reading this, then you're going to buy silver if you don't own it already.

It's impossible for me to reach any other conclusion after reading the feedback from last week's Breakout segment assessing one trader's million dollar bet against the semi-precious metal. You may have watched the clip already; if not, it's worth checking it out if only to scroll through the comment section below the article.

Look at the heat coming back at me from silver longs. Keep in mind that I'm long gold and loud about it. Remember that I'm constantly advising traders to never fight a trend. I'm hardly oblivious to the fact that silver's trend is higher. Also note that my first question regarding the bearish silver trade focused on exactly what kind of crazy person would buy silver puts. None of that matters; silver bulls responded to the piece as though it were a five-minute study on the ugliness of their children.

This isn't my first bubble rodeo. I lived through the Internet bubble and the Ag, BRIC and housing bubbles at the end of the last decade. From my personal experience, and as a life-long student of human nature, I know two things for certain: First, human beings love money. Second, human beings hate watching other people make money without them.

I'm well aware of the fundamental arguments for buying silver and gold. In short, the dollar is worthless, silver "should" have been higher all along, silver and gold are going to be the only asset that's going to hold value in the coming global meltdown, etc. All of these theories are well and good, maybe even right, but that's not why people are buying silver today. The fundamental silver bulls have been long for ages. The people buying today are buying silver because it's going higher and they want to get a piece of the action. Put it this way -- I'm long gold from much lower but I'm not at all tempted to get longer here. But, wow, do I wish I had some silver. That covetous thinking is entirely human. Don't ignore it; understand it.

Because I know you're going to be reckless, I'm here to tell you some rules for chasing bubbles. Don't argue with me as to whether or not silver is a bubble. I don't really care. The fact is that charts like silver's 5-year don't occur in nature. They are functions of a mob. Being part of a mob can be fun and lucrative as long as you don't get arrested or killed. Here's how to avoid such a fate:

* Don't pretend you're a fundamental player. Clinging to a position because you're a "long-term holder" isn't appropriate after an 8-fold increase. Getting long now is chasing, plain and simple. Don't convince yourself otherwise.

* Have an exit plan. I give you some points at which to sell, should silver pull back sharply. If you don't like mine, then use your own. Just have a plan.

* Don't fall in love. This is true of any investment, but particularly true when an asset's price goes parabolic, as is the case for silver. The responses to last week's piece suggest a passion people shouldn't have about their portfolios. That's a huge, raging, enormous red flag.

* Scale in. Don't put your money to work all at once. Put a little bit into play to ease your very human desire to chase. Get a taste to ease the pain and keep some reserves ready to deploy if and when we get a minor pullback. You don't want to be the person who plants a flag at the spike of a bubble.

I'm not here to debate the fundamentals of silver. This isn't an economic argument but a guide for being reckless without getting killed. I'm not advising you to do anything; I'm telling you how to get out alive when you chase silver because, in my experience, we're all likely to succumb to the allure of the glistening, sexy metal.

As always, tell us what you think. Write to us at Breakoutcrew@yahoo.com.