Silver Leads the Precious Metals Bull Market
Today's Idea
With $45 Silver on the doorstep and the potential for $50 plus Silver now on radar screens, we may start to see increasing volatility in Silver prices in the coming weeks. Option prices have become rather expensive, making buying options outright an expensive proposition. Those traders looking for Silver prices to continue to move higher may wish to explore the purchase of a bull call spread in Silver futures options. For example, with July Silver trading at 43.870 as of this writing, the July Silver 48 calls could be bought and the July Silver 52 calls sold for about 0.750, or $3,750 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $20,000 minus the premium paid, which would be realized at option expiration in late June should July Silver be trading above 52.000.
Fundamentals
Though not yet trading at all-time highs like Gold, Silver futures have once again reached a new contract high, with the July Silver futures trading just below the $44 level. This is the highest Silver has traded since the end of the historic Silver bull market back in early 1980. Silver bullion held at COMEX warehouses has been declining lately, which is a sign that investors are not only interested in speculating on Silver prices, but that they also wish to actually take delivery of the metal. Internationally, demand for Silver looks robust, with India, who is normally the world's largest consumer of Gold, also expected to expand its Silver imports in the coming year. Historically, Silver has been the leader in the great precious metals bull markets, and a look at the Gold/Silver ratio shows the ratio heading towards 34 to 1. This is compared to a ratio closer to 65 to 1 just one year ago A ratio below 40 has normally occurred in the past when inflation was expected to rise. With the U.S. Dollar Index hovering near its yearly lows, it should come as little surprise that both Gold and Silver are performing as well as they are, as investors continue to move assets into the precious metals sector in order to divest from currencies -- especially the greenback.
Technical Notes
Looking at the daily chart for July Silver, we notice that prices have been in a nearly perfect uptrend since the yearly lows were made back in late January. Since that time, Silver has rallied nearly 17 cents per ounce, which is a huge amount for such a short period of time. Even though Silver prices have moved sharply higher, the moves have been rather orderly and not like the parabolic moves we saw at the end of the 1979-80 Silver bull market. The 14-day RSI has moved well into overbought territory, with a current reading of 84.79. 45.000 is seen as the next major resistance point for July Silver, with support found at the 20-day moving average, currently near the 39.500 area.
Mike Zarembski, Senior Commodity Analyst
