How much is an ounce of Gold? We need to remind ourselves in this moment of euphoria that an ounce of Gold covers the a space from the tip of your finger to the first crease on your finger. Below is a picture showing the size of an ounce of gold.

That gold coin now trades inter-market at $1517 US Dollars. Silver, its less shiny equivalent, traded at a record $49.79 per ounce. In terms of market frenzy, we don't get more ecstatic than the markets are now. You can barely whisper to the next person that "gold is over-valued" without one of the gold extremists (gold bug on steroids) giving a lengthy speech on the history of metal, how many gold mines there are in the world, the conspiracies of gold manipulation, their thoughts of Austrian economics or blaming Goldman Sachs for the world's evils.

We are willing to take heat for this issue as we know we will, but we must give our points of view so that at the very least we can highlight the risks to investing in precious metals at this point in time and avoid possibly being lured into another mania.

American Civil War And The Gold Price

During the late 1800's American Civil War, the link between Gold and Paper Money was broken as money printing was required to help fund the war efforts. The Legal Tender Act of 1862 made privately owned gold and silver mining illegal. It allowed the Federal Government (no Federal Reserve back then) to issue for the first time, paper currency that was not backed by either gold or silver. As a result, people began hording almost all of the gold and silver coins in circulation. Once the war was over, a return to the Gold Standard was then decried. The result of the Gold price? Here is a situation where a country was off the gold standard and a belief that the return to the Gold Standard was around the corner. This is the same situation that many are advocating today - a return to the Gold Standard. Yet after the American Civil War, the price of Gold went DOWN and NOT UP as many are proclaiming today. It went down because people understood that carrying notes pegged to gold was much lighter to carry and it was "as good as gold". If it is true that today we are seeing the beginnings of a return to the Gold standard, why are people hoarding Gold? The paper will soon become "as good as gold" once again.

Plethora Of Non-Confirmations

The chart above shows a comparison of Silver, Gold, Platinum, Palladium and Copper. Of these metals, three of four have failed to break to new highs. As Dow theory would have it, we need confirmation of highly correlated markets to ensure a sustained rally. This is clearly not the case in this regard.

Parabolic Rise: History Repeating Itself

Below is a chart showing historical rises and falls with similar price action to today's silver price. The Nikkei, the Nasdaq, the Saudi Arabia stock market, the Shanghai Composite and lastly the Silver price. With rises as parabolic as the one we are witnessing, history has it that it usually does not bode well for silver. While we understand that Gold and Silver can continue blowing up to extremes, it is a ride that is too volatile with too much downside risk for one to be involved in. If you have longs, we suggest now is a good profit taking opportunity.