The Forgotten Metal
Fundamentals
With all the focus seemingly on Gold these days, many traders seems to have forgotten that Silver has been one of the largest gainers this year. While not a pure defensive play like Gold, Silver can be seen as a hybrid metal. It has value both as a precious metal and an industrial metal, which makes it more sensitive to economic conditions than Gold. If the global economy is truly on its way back to form, the upside potential for Silver could exceed other precious and industrial metals. Industrial growth in the BRIC nations, namely China and India, could result in an uptick in Silver demand. We are moving closer to the Christmas shopping season, which could fuel demand for electronics and, in turn, Silver. The US Dollar has been on the decline for the past several months, and a rebound in economic activity favors emerging and growth currencies over more established nations, further bolstering commodity demand. The price of Silver has moved straight up for over a month now, so some traders may begin to view the market as overbought.
Trading Ideas
Silver fundamentals have improved and will continue to improve, barring a double-dip recession. The chart does show that prices may be overbought and due for a pullback. For these reasons, some traders may wish to consider entering into a bull call spread, for example, buying the Dec Silver 22.25 call (SIZ022.25C) and selling the 22.50 call (SIZ022.5C) below the current market at 0.085. The spread risks the initial cost of $425 for a potential profit of $825 if the price of the December Silver contract closes above 22.50 at expiration.
Technicals
Turning to the chart, we see the December Silver contract moving higher, without any correction or significant consolidation since late August. This type of parabolic move is oftentimes followed by a sharp pullback in prices. In general, the longer a market moves without a correction or consolidation, the more dramatic the pullback tends to be. Some traders may look for a reversal pattern to form on the chart, especially if the run-up accelerates.
Robert Kurzatkowski, Trading Specialist
