This is why you don’t mess with bubbles to any extent that they can substantially alter your financial well-being.  Last Thursday I placed a meager short position via OTM puts on silver.  Just three days later those puts are looking more than worthless.  Bubbles are not to be messed with in any real size.  My bet was placed with the full understanding that it was a bet on black and nothing more.  If it hit it would be be a decent winner, but if it lost I’d be fine walking away from the table to fight another day.

Bubbles are extremely unstable and unpredictable environments.  Anyone playing in the silver pool must recognize that they are not making a prudent bet in either direction.  They are merely gambling. That said, congratulations to anyone who has owned silver for a substantial period of time.  It’s been one heck of a ride up.  And in my opinion the rollercoaster is starting to look at little shaky as it goes parabolic….

* Mr. Roche is short silver via OTM puts and long silver via mutual funds held in retirement accounts.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Unreal move. Just curious Cullen – would you mind disclosing what fund you own silver in?

  2. I’ve owned PRPFX in a retirement account for years. They own all sorts of weird silver bets. I’ve been a big fan of lazy portfolios since my days at Merrill….As a quarter of the fund the metals bets are not huge (for me personally), but the puts act as a decent hedge against the downside. I don’t really want to sell the fund just because I think there’s a bubble in silver….I actually wouldn’t mind some opinions on that if anyone has it. Would you sell a mutual fund just because you believe a portion of it is in bubble territory?

  3. Ah, thanks. And hang in there with the puts. You never know? It’s a long time til expiration.

  4. Also, fwiw, I wouldn’t sell a fund just because a small part of it looked bubbly. I am pretty sure PRPFX owns less than 25% silver anyhow, but don’t take my word for it.

  5. I feel your short was a bit too soon, Cullen. With the velocity silver’s had recently there won’t be a retreat until silver tests its all-time nominal highs.

  6. Beauty of the harry dent approach is that the legs should offset one another. My worry is that a collapse in silver will not be offset by equities and bonds….

  7. I look at investing opportunities as trying to catch boats before they leave the dock. When the boat leaves the dock without you, the correct solution isn’t to jump into the water — where sharks live — or wait for the boat to come back.

    I prefer to look for other departing boats.

  8. Are you long? Or are you just commentating but not betting?

    Remember its easy making predictions when your on the sideline…. :)

  9. Indeed, it’s been a phenomenal run in Silver. In my experience, insuring against price declines as you tried is just incredibly hard to do.

    “Anyone playing in the silver pool must recognize that they are not making a prudent bet in either direction. They are merely gambling.”

    Well the art of contrarian investing is kind-of the art of taking the house view.. If the trader that executes on the long or short side is doing so upon some false premise (e.g. about the way prices ‘should’ move) – I think we can say that taking the other side to them is not ‘gambling’ in the same way that they’re gambling. I know that the price movements in Silver have been extraordinary and wild, but the zero-sum nature of the game hasn’t changed.. by executing on the other side of a ‘loser’ you have to be a ‘winner’.

  10. Holy….!

    I’m regretting that November 2010 day I didn’t buy tons of long dated SLV options because I felt SLV wasn’t going anywhere soon.

  11. Hey Cullen,

    Your points are completely spot on. It is such an unpredictable situation and so dangerous on both sides although I will admit I am totally fascinated by this one. I was thinking we needed to have that $5 up move to finish this thing off. All the signs are there. I like your put trade and think it will be a winner if you do not take them off too soon like I am accustomed to doing!

  12. You want to short bubbles on the way down, not the way up. Don’t worry about missing the top.

  13. As Gary Savage said, you NEVER, never short a rising market unless, of course, flotsam is your

    choice of building material…

  14. Seems to me to be contingent upon no “dead cat bounce” and I don’t see how we can avoid it. With the Saudis mad at us over Mubarek and Iran and reduced output from Lybia and projections of $5.00 gas by the Fall and oil already at $113 / bbl, well … to quote a hard working blue collar guy I heard the other day, “What’s the point? I’m just working for gas.”

  15. Cullen, you wait for a top, pullback and test of top. upon result of that test or the overriding tech foration………u go short, only then. if it has been a bubble the ride down will be long and profitable

  16. What ever happened to buy low/sell high…or just taking profits? If it’s in a retirement account…taxes should not be a concern…and you can always buy it back.

  17. easier said that done. you can make mistakes waiting as well.

    i think you need to have a two position decision tree. first identify what you believe is a serious overvaluation, and then establish an initial short position. you may be wrong, or you may be early. second, then identify the market correcting the price (hasn’t happened yet in slv). then expand your position.

    establish an exit objective at point two and don’t change it.

  18. I don’t watch silver but I watch the Silver-Gold ratio and that has gone through the moon, back to the levels of 2006.

  19. SLW got upgraded, silver is up .70, yet SLW is down over 2%. Equity traders have no faith in the price.

  20. If and when the top is in, what would be the best way to short silver? Options? AGQ? ZSL?

  21. “If and when the top is in,”

    when you hear the bell, let me know. isn’t that the thing about bubbles, only hindsight is 20-20 (mixing sensory metaphors like a pro)

    cullen is usually pretty smart about his choice of trading vehicles, but his choice of a put option scares me because of the inherent potential for time delay. i would prefer to buy an inverse etf and simply hold it until i hit a profit objective, since i have no idea when (or if) the bubble (if it is a bubble) will burst. my holding is only 2% of a portfolio that i don’t need to pay bills with, so i can afford to wait

  22. Its almost like you want this little side bet to go poorly, TPC….

    Got my feet wet in ZSL this morning.

  23. Why screw around with silver!!??

    Short the heck out of the Japanese Yen. You heard it here first folks.

    Mark this post in a year…

  24. Silver Margin just raised by CME. One of these times it is going to actually mean something :-)

  25. The cartel will be doing a raid for sure on Wednesday after the Fed says QE2 is ending in June and no plan for QE3 (haha – laugh at that).

    Go long zsl on Wednesday and really all the inverse commodities will probably do well. Seems like they want to push down on the commodity complex, and they usually time their raids around major events.

  26. “Beauty of the harry dent approach is that the legs should offset one another.”

    PRPFX follows the Harry Browne philosophy. Harry Dent is in another universe.

  27. I don’t know how long you have til those puts expire, but I’m thinking ditch the mutual fund and double up on the short position if the puts you’re buying will last at least 60 days (sorry, I don’t trade these things – just a philosophy major college student going to work at an ibank who’s become very fascinated by monetary theory and the market in general). But I have a bad gut feeling that gold and silver have had highs that would surprise me to move more than another 2%. As you’ve mentioned QE is a monetary non-event, and only a fear of inflation can be behind this sort of behavior. Honestly, what does it say about us all to put so much capital into non-producing entities? And with the 34 straight days of oil prices surging, a perceived lack of supply, the greatest degree of uncertainty I would argue since we dropped the gold standard (japan, MENA, QE3? and the beginning of realizing the impotent director fallacy of the FED, junk bond surge, commodities boom, a still growing derivates trade that literally can’t allow for a systemic sweep of the Financial sector without a collapse, a growing EU crisis, the austerity debate and the greatest polarization of politics seen in our lifetime, recent surveys that show the nation as a whole has reached an all time low in mood, unemployment (especially considering how those statistics have been manipulated over the past few decades), the no-bottom-to-be-found housing market, etc etc). At some point soon, I think you’ll see – as you’ve appropriately named it – cannibalistic capitalism eat itself as we try to force a recovery because instead of fixing a broken incentive structure, we’ve let the FIRE squad distort it even more to ‘get back on their feet’. But at the bottom line, sentiment is starting to turn quickly for the worse. I really hope I’m wrong. I couldn’t be happier to be, but I think we’re on the cusp of a serious deflationary period. You’ve said it yourself, there’s no new money from QE. And your average citizen doesn’t want to take on new debt; they’ve spent the last few years trying to repair their credit and get out from under the bank. Under this scenario, the banks (who are the one’s that actually make money by creating new loans; the FED’s balance sheet is actually countercyclical to the supply of money+credit…) can’t introduce enough money to pay down the already outstanding interest. Since the crash, banks balance sheets have continued to shrink. All we need now is for a few haircuts and we’re all in a world of ‘systemic’ hurt. And though I agree we should fix some of the problem with deficit spending, with this political climate it isn’t going to suffice. To be fair, I understand it while we have to borrow money because at some point there’s a threshold to the percentage of general revenues we’re going to have to spend towards debt service. I think the real solution is in introducing real money – the kind we just print not borrow – and inject it towards the middle and lower class through programs designed to build much needed infrastructure and lower our unemployment burdens.

    I’m actually trying to write a book on the issues we’re facing under my own philosophical framework about the epistemology of knowledge and the nature of man to be concluded with a proposal for a holistic solution. I’d be honored if I could get your thoughts on it. I assume you have my email…

  28. Cullen,

    I may write mainly about housing markets, but I also do extensive research on the precious metals and have written about them too.

    Do you know what the cost of pulling an ounce of silver out of the ground is for Hecla Mining? It’s about $1.50. That’s right. How is that for cash flow? Only problem is that they’ve had a long-running battle with the EPA over cleaning up the Coeur d’Alene area in Idaho and have almost finalized a settlement which will cost them at least $150 million over the next few years.

    Anyone reading Atlantic Capital Management’s posts lately on the likely squeeze of the silver shorts knows that there is probably a growing shortage of deliverable silver bullion. You folks still shorting silver had better watch the open interest on the nearby delivery contract.

    I started writing about precious metals before some of you were born. That gives me a perspective that is crucial here. Try reading Article One, section ten of the Constitution where the Founders prohibited the states from making anything but gold and silver coin a legal tender in payment of debts. They knew all about the dangers of fiat currency.

    You traders talk about gold and silver as if they are no different than pork bellies or cotton. Get real. Until 1933, the dollar was defined in terms of a certain weight of gold. Tell me what it is now?

    Like it or not, gold and silver are now in a battle to the death with the dollar and all the other fiat currencies. How many of you are prepared to bet your life savings on the dollar? A growing number of Americans, including the U. of Texas’ endowment fund, are not. I’m with them.