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Buyers Beware: Silver Crashed 11% in 24 Hours

"Absolutely this serves as a warning that ‘buyers should beware’ in any market that makes stratospheric or parabolic moves, especially when trading leveraged positions."" -Nationalfutures.com, John Person

Shortly after the start of overnight trading at 12:10 a.m. on Monday, silver futures surged to a multi-year high of $49.82 per ounce. Nine hours later, by the start of stock market trading in the U.S., the May Silver contract was down eight percent. Shortly before midnight Monday, the futures would touch a low of $44.61, completing a 10.5 percent correction in less than 24 hours.

Because the bulk of those moves took place in off-hours electronic trading, and because the metal pared some of the losses quickly, many investors may have not even noticed the wipeout. Silver ended regular trading at $45.06 on Tuesday.

Regardless, this veritable "Flash Crash" in silver should serve as a reminder, especially to the retail investors jumping in now, of the volatility that is possible with commodities. It may also be the sign of a top in the best trade since shorting the housing market, traders said.

Silver bar and coins
Thomas Northcut | Photodisc | Getty Images
Silver bar and coins

“There was no fundamental cause for the pullback, because there was no real fundamental cause for the 30 percent rally in a month,” said Dan Nathan of RiskReversal.com. “We know how this ends. That was a blow-off top.”

Silver was below $10 in 2009, so a move above $50 would represent a more than fivefold increase. Silver has been outpacing its precious peer, gold, as hedge funds hav3e looked elsewhere for a metal with a similar "store of value" quality while the Federal Reserve devalues the dollar through its easy money policy. Silver coin advertisements may soon start to rival the gold advertisements on TV.

“Absolutely this serves as a warning that ‘buyers should beware’ in any market that makes stratospheric or parabolic moves, especially when trading leveraged positions,” said John Person, president of Nationalfutures.com and co-author of the Commodity Trader’s Almanac.

Speaking of leverage, CME and the Shanghai Gold Exchange raised margins on silver Monday, making it more expensive to borrow and buy the metal. Some traders blamed this margin increase for the fall. Others said jitters before the Federal Reserve’s policy statement Wednesday or simple technical reasons were the culprit for the 23-hour plunge.

“Using spot silver as a guide, we have looked for a test of the 1980 high near $49-50,” Mary Ann Bartels, head of U.S. technical and market analysis at Bank of America Merrill Lynch Global Research, said in a note to clients.

“With the sharp downside reversal off this high, the risk is for a near-term buying climax for silver," she said. "While the longer-term pattern is bullish, shorter-term backing and filling is not ruled out and we would considered this a buying opportunity for silver.”

Still others see a classic bubble, fueled first by a legitimate fundamental cause, and then taken into the stratosphere by momentum-chasing hedge funds before the retail investor finally catches on just in time to be holding the bag. More areas could be ripe for bubble-blowing these days with the explosion in popularity of exchange-traded funds.

In March, ETFs focused on silver had $838 million in inflows, behind only Japan and Emerging Markets, according to data from Birinyi Associates. That’s a lot of money flowing into funds not focused on a large sector of stocks or a whole country. While those who put money in last month are still in the green for April, many traders this week’s vicious sell-off is just a sign of things to come.

“This is what happens when the children get involved with a hot money trade,” said Joshua Brown, money manager and author of the Reformed Broker blog.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.


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Trader disclosure: On April 26, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (AAPL); Seymour owns (BX); Seymour owns (F); Seymour owns (GE); Seymour owns (INTC); Seymour owns (POT); Weiss owns (VZ); Weiss owns (QCOM); Weiss owns (NAV); Weiss owns (TCK); Weiss owns (UUP); Weiss owns (DVN); Weiss owns (COP); Weiss owns (BTU); Weiss owns (TBT); Weiss owns (NIHD); Weiss owns (MSFT); Weiss is short (X); Weiss is short (AKS); Terranova owns (JPM); Terranova owns (XOM); Terranova owns (OXY); Terranova owns (C); Terranova owns (VRTS); Terranova owns (BAX); Terranova owns (BX); Terranova owns (AKAM); Terranova owns (TCK); Terranova owns (HOC); Terranova owns (UPL)’ Terranova owns (V); Finerman and Finerman's firm own (AAPL); Finerman and Finerman's firm own (BP); Finerman owns (C); Finerman and Finerman's firm own (CMI); Finerman and Finerman's firm own (CVS); Finerman's firm owns (IBM); Finerman's firm owns (JPM) and (JPM) leaps; Finerman owns (JPM); Finerman and Finerman's firm own (MSFT); Finerman's firm owns (TGT); Finerman owns (UNG); Finerman owns (USO); Finerman's firm is short (IWM), (MDY), (SPY); Finerman's firm is long S&P 500 puts; Finerman's firm is long Russell 2000 puts

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