Will The Speculative Bubble Burst Soon In Silver And Gold?

Due to the extended bull market in precious metals, Gold and Silver related ETFs remain superior performers. The higher trend in both Gold & Silver appears to still be the case after breaking out to the upside after 3 month congestion pattern. Investment demand for both precious metals remains strong amid QE2 and easy money policies by central banks world wide.

Based on history it’s possible we are only about halfway through this bull market in commodities and precious metals. Silver and Silver Mining ETFs have come to market with almost immediate success by riding this wave of investor euphoria. Investor sentiment has also lead to a strong rise in trading volume for the leveraged precious metals ETFs as well. This stands in stark contrast to what people were speculating on in the 90s, namely tech stocks and the next Internet IPO.

It seems that investment themes always go in cycles and each cycle ends with a tremendous burst of buying that draws everyone in near the top of the run. It fascinates me to see that once again precious metals are making their way back into investor portfolios just as they did 3 decades ago. Things could even be crazier this timer around you can hold ETFs in almost any investment or retirement account which was not the case with gold or silver bullion.

Gold and Silver are not the only sectors being impacted by the surge in ETF trading, it is affecting all types of investments. Smaller commodity markets such as palladium have really been feeling the effects of the ETFs in this past year since PALL started trading in January. Stocks of publicly traded companies can benefit from the same effect, right now ETFs own $7.8 billion worth of AAPL and nearly as much of XOM as well. This can have a positive or negative effect depending upon the mood of investors. ETFs allow large traders and hedge fund managers to dump million dollar sector positions much more quickly than they could using individual stocks. These fast moves in and out of sector based trades can cause other ripples (or waves) through out the markets, we witnessed this last spring with the so called “Flash Crash”. All this money looking for the next hot market will keep volatility high in Gold and Silver for some time to come.

Even though precious metals have put in one heck of a performance in the past 10 years, there should still be some explosive moves to come. Many gold investors believe that a collapse of the U.S. dollar will one day cause gold and silver to soar to unprecedented levels, looking at things I can’t rule it out. When the average person starts their conversation by talking about their Gold and Silver ETFs and how much they have made on them, then it will be time to sell everything off. With all the bullish and bearish ETF products out there it’s no doubt that investors and traders will be trying to position for the next big move in the months ahead. Prices will rise, then prices will fall and the few who time it right will make their fortunes. For most though, the ending will be as sad as the real estate bust or the end of the tech bubble.

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