Did the Silver Market Just Hit a Near-Term Top?

Silver (NYSE:SLV) was all the rage in April as “white gold” has soared and worked its way into a parabolic frenzy, but now May seems to have brought a different tone to this overheated market.

In the chart above, you can see how silver (NYSE:SLV) has exploded since early February and now is approaching what could be the last phase of an impressive bull market.

Price acceleration like this tends to bring out the day traders, speculators and a high degree of public interest, and usually these are warning signals that come with the end of most bull markets and eventually lead to the loud popping of the bubble.

On Sunday, May 1st, 2011, silver futures experienced something of a “flash crash” in Asia trading, dropping as much as 12% in just minutes before eventually recovering some of that loss.  This type of volatile action can be the signal for a blowoff top, and with the assassination of Osama Bin Laden, one can expect that a swift decline in silver could occur as the dollar strengthens in response to this historic event.

With prices now reaching thirty year highs and silver’s (NYSE:SLV) price acceleration running well ahead of gold’s, the market certainly seems to be reaching an overheated stage.  However, bulls will argue that China (NYSE:FXI) will continue to drive sliver prices higher, along with major funds and India, while the CME Group (NASDAQ:CME) has raised their margin requirements on multiple occasions recently to dampen enthusiasm for the white metal.  Bulls would also argue that $100 silver is a likely possibility and a look back at history would suggest that silver has been even more expensive in ancient times, commanding as much as $800 per ounce in inflation adjusted dollars as early as the 15th century.

If you’re a silver bull, the most popular ETF is SLV (NYSE:SLV), which recently has been trading at higher volumes than even SPY, the S&P 500 Index (NYSE:SPY) ETF which is usually the largest ETF by trading volume.

If you’re a silver bear and think the bubble is about to pop, you could use ZSL (NYSE:ZSL), the ProShares Ultra Short ETF, that offers two times negative moves against silver prices or you could buy put options on SLV itself.

Like all tulips, dot.com stocks and oil prices (NYSE:USO), silver could likely one day go the way of all bubbles and pop painfully in peoples’ faces.  That day could be coming soon as “white gold” leaves a frenzied April for a new environment in the month of May.

Disclosure: No positions in ETFs or stocks discussed in this article.

John Nyaradi is the author of Super Sectors: How To Outsmart the Markets Using Sector Rotation and ETFs

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