Gold/Silver: The only chart you need to watch

Over the past week, order flow from the trading desk has given me an inside view of how traders perceive the economic environment. When commodities such as Energies or Agricultural markets decline, inflation expectations decline, reducing interest hike expectations. The U.S. Dollar then declines, giving way for Gold, Silver, and U.S. Equities to rise along with the bullish sentiment. With risk-on back in the markets after three straight down U.S. Dollar days, I wonder how long this party will last?

Monthly Gold/Silver Ratio

By connecting the dots as to how traders will redeploy their capital, it then becomes advantageous to try and pinpoint undervalued commodities. One of the ratios we publish in our daily Tactical Insights report is the Gold/Silver ratio. The ratio measures the amount of Silver it takes to buy one ounce of Gold. Looking at the above Gold/Silver ratio since 1980, one can quickly identify the extremes and similarities. Since the ratio has been published, only three times has it been above 95:1. History has shown that each time an investor purchased Silver and held it longer than six months, it resulted in Silver prices gaining an edge on Gold. I went back through 20 years of my trading strategies to create a Free New “5-Step Technical Analysis Guide to Gold but can easily apply to Silver.” The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.

Silver Options Strategy

In the past, I have found that it is best to use a calculated risk strategy in deeply oversold markets that haven’t quite solidified a technical bottom. An options bull call spread is a trading strategy aiming to capitalize on an increase in the price of a given market or asset during times of high volatility or for counter-trend trades. The option strategy consists of two call options that create a range that outlines a lower strike point and an upper strike point. The bullish call spread strategy helps to cap your max loss if the price of an asset drops. However, the strategy also limits the potential gains in case of a price increase. Bullish investors often use this when trading futures as a calculated risk debit spread.

We use the December Silver futures contract in this bull call spread example. We are buying 1 December Silver $18.50 call at 75 cents as our long call. We then simultaneously sell 1 December Silver $19.00 call at 60 cents as our short call. This action creates our premium, which is 15. We then multiply that by $50 to account for Silver’s multiplier to get $750, or our total premium paid (plus any commissions or clearing fees).

Knowing our premium paid, we can calculate our potential max profit simply by taking the difference in our strike prices ($19.00 – $18.50), which in this case is 50 cents, then we multiply 50 by $50 because this is a futures contract. That gives us a total of $2,500 as our max gross profit, minus our $750 premium, leaving us with a max net profit of $1,750 (less any commissions or clearing fees). If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on transferring your current investing skills into trading “real assets,” such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.