Wednesday, February 15, 2012

Some traders who are looking to establish a bullish position in Silver but who wish to have some control over the potential risk on the trade may perhaps want to explore buying out-of-the-money bull call spreads in Silver futures options. For example, with May Silver trading at 33.550 as of this writing, the May 35.00 calls could be bought and the May 37.00 calls sold for 0.570, or $2,850 per spread, not including commissions. The total investment in the spread would be the maximum risk on the trade, with a potential profit of $10,000 minus the premium paid, which would be realized at option expiration in late April should May Silver be trading above 37.000.

Fundamentals

Gold bulls refuse to relinquish their hold in the market as the solid rally we have seen so far this year has removed much of the bearish technical action we saw in the 4th quarter of 2011. Now many traders will likely question whether the recent bull move still has some legs. One clue to Gold’s next move may lie in the price movement of its more volatile precious metal cousin Silver. Historically, Silver has led the precious metals sector during bull markets, and this was highlighted back in April of 2011 when the ratio traded to just above 30-to-1 (30 ounces of silver to equal 1 ounce of Gold). Though Gold prices continued the rally through early September, Silver did not follow Gold’s lead, sending the Gold/Silver ratio soaring to over 56-to-1, which culminated in a nearly $400 decline in the price of Gold as 2011 came to a close. Currently, the spot ratio has been trading closer to 51-to-1, which may be a sign that investor interest is returning to the entire precious metals sector and not just “safe haven” Gold buying. This bullish outlook may have to do with improving economic data coming from the U.S., which would be supportive for the more industrial of the precious metals such as Silver and Platinum, which also have seen their price discount to Gold begin to narrow lately. Looking at daily continuation charts for both Gold and Silver, we notice what may be large “bull flag” formations in both charts, with Gold confirming this continuation pattern by breaking above the top trendline of the flag formation. Though Silver has not yet confirmed the bull flag formation, the decline in the Gold/ Silver ratio may be a signal that Silver is poised to re-establish its bullish trend.

Technical Notes

Looking at the daily continuation chart for Silver, we notice what appears to be a large “bull flag” formation, with prices currently near the upper end of the formation. Above current prices looms the 200-day moving average, currently near the 35.000 level, which will act as solid resistance. Should we see a close above this key price level, it would add to the overall bullishness seen since the start of the year. Near-term support is seen at the recent low of 32.980 made back on January 31st.

Mike Zarembski, Senior Commodity Analyst

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