How Overextended is Silver?

With silver surpassing $46 dollars this morning, I believe it is time to take a step back and reevaluate this remarkable run. About a week ago, I wrote that silver’s rise has come too far and too fast. I stated that I would lean bearish if silver made a spike move to new highs. Well since I issued that statement, silver has risen nearly 15%  in a week. I am now getting very concerned; we are in the middle of the spike move I was talking about.

Silver has risen 160% in 7 months. No matter how bullish you are on silver, you must admit that this move is a bit extreme. Silver is currently trading 70% above its 200-day moving average. If I saw a chart of silver without knowing what asset I was looking at, I would think it was a bubble. In fact, this rally in silver is more extreme than the rally in the Nasdaq in 2000 before the bubble burst. The Nasdaq “only” rose 100% in 7 months. This should make all investors in silver at least a little cautious.

I’ve been patiently riding silver this entire move higher, but it is time for me to lighten up a bit here. I am willing to miss out on a portion of this spike move higher for the sake of protecting my downside. I think the risks are heavily skewed to the downside at this point. Everyone is bearish on the dollar and this leads me to believe that a strong countertrend rally is coming. If the dollar rallies, it is going to drag silver lower. Make no mistake about it, there will be a trend reversal eventually.

There is no way to know exactly what lies ahead for silver. However, all investors should always be keen on protecting the profits they have attained. Huge rallies tend to lull you to sleep while making you believe that a correction will never arrive. I think a correction in silver stocks can easily be of the 30-50% variety. This has been quite a ride for silver, and I don’t think the highs in silver are in yet, but this particular cycle is probably nearing its end.

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