The Biggest Lesson From Silver's Crash

This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.

In January, silver prices in Shanghai traded at a record $14 premium to London exchanges.

Yet, investors in China were still waiting for hours outside of shops to buy the metal.

Until recently, silver had been rising nearly every day for months. From the end of October to its peak last month, it surged 137%.

That's not a healthy rally. And there were signs of frothiness everywhere...

But betting against a booming asset is always harder than you think.

Even betting against silver's one-day crash could have cost you. Unless your timing was perfect, you probably lost a lot of money...

On January 30, silver prices fell 26% – the metal's worst single-day drop ever.

If you rode the rally higher, you might now wish you had gotten out of the metal altogether ahead of the crash... or even bet against silver.

But that thinking is more than dangerous. It can ruin your portfolio. And silver's recent move is a great example of why...

Even Great Timing Could Lose You Money

If you tried to bet against the metal, you almost certainly lost a lot of money. And if you used leverage, you're going to have a hard time digging out of that hole.

We can see this through ProShares UltraShort Silver (ZSL). It's one of the only exchange-traded funds that allows you to bet against silver. It returns twice the opposite of silver's daily performance using futures contracts.

So when silver falls 2% in a day, ZSL will rise 4%. It does the opposite, with leverage.

Now, let's say that you started to get worried about the silver rally in December. The metal rose as much as 60% from the end of October through late December.

But you weren't ready to bet against silver just yet.

Well, by January 23, silver was up another 44% to start the year. By now, you're absolutely sure this rally can't last. You end up buying ZSL that day.

You don't know it at the time, but silver will peak the following Thursday. Your timing is almost as good as it gets.

Still, you're down 22.5% before the crash.

Then on Friday, silver falls 31% in a single day. It falls on Monday, too... then again on Tuesday.

You're ready to cash in, right?

Actually, despite incredible timing, you're sitting on a loss...

In order to profit, you would have needed to time the top perfectly.

Now imagine your timing was slightly worse...

Instead of being within a week of the ultimate peak, you were three weeks off. Say you bought ZSL on January 9.

In that case, you would have been down 44% by February 3...

Again, this is a nearly 45% loss despite silver having its worst day on record.

This is why you never bet against a bull market. It can always get frothier before it rolls over. And you can lose a lot of money trying to predict when that rollover will happen.

This case also shows how using leverage can crush your returns. Even good timing can lead to major losses. That's especially true in highly volatile assets like silver.

You're better off with a simpler approach. Reduce your exposure as a rally overheats... And set stop-loss levels. If you hit a stop, sell.

Trying to call the top in any market is almost always a losing game.

Good investing,

Chris Igou