White Metals Alert: Silver Near a Low?
Dovish Fed Could Take the Reins off Silver
Put Selling Opportunities in Summer Contracts
A strong dollar and concerns about the global economy have kept precious metals prices in a steady downtrend for much of the past 4 years.
But winds of change could be blowing in the metals markets and those seeking to ride those winds may want to consider the white metals as their vehicle of choice.
The dollar has been on a tear which has pressured most all physical commodities to one degree or another. But the latest and most extreme surge in the dollar’s value has come since mid-2014, largely on expectation that the Fed was preparing to raise interest rates.
Now that the Fed has removed the word “patient” from its dialog, the mystery appears to be gone. However, the Fed has seemed to take a more dovish stance than many have expected. Apparently, it has taken notice of the surging dollar as well.
A dollar continuing to rage could be a drag on US economic recovery. With US GDP expected to grow by 3.3% this year (source:Kiplingers*), Yellen and her pals likely aren’t going to do anything to rock the boat too hard. This could be a disappointment to dollar bulls who may have been betting on more aggressive tightening in 2015.
A consolidating or at least stabilizing dollar could do much to take the burden off of precious metals prices. But with global stock markets surging, it could be the white metals that lead the charge.
Gold tends to be the primary beneficiary of geopolitical or stock market concerns. But with interest rates near zero across most of the developed world, global economic pumps have been primed for growth.
The US stock market remains near all time highs. China’s Shanghai Composite just hit a fresh 7 year high, up 14% this year, having nearly doubled since 2008 lows. The German DAX hit an all time high in January.
If you believe that stock indexes are predictors of economic growth, then the global economy may have indeed turned the corner and be on the way back.
Growing economies mean demand for industrial goods. In the new economy, that means electronics. In this scenario, look for industrial metals to outperform gold. Silver (used in most electronic devices) and palladium (used in automobile catalytic converters) would be prime beneficiaries in a recovering economy.
Sales of Smart phones, tablets and new technology flat screen TVs are expected to surge in 2015. Over 1.5 billion smartphones alone will be sold this year, up 19% over 2014. New “4K” technology is expected to drive TV sales this year, with 4K tv sales expected to be up 150% over last year.
While all of the white metals should benefit, option writers should focus on Silver as that is where the volume is in both futures and options.
There is estimated to be about 36 cents worth of silver in the average smart phone and from 1-3 ounces of silver in a typical 42 inch flat screen tv.
We think the options are currently pricing a continuing surge in the dollar. But even a slowing in the rate of ascent in the dollar could open the door for the white metals. This would allow prices to begin focusing on demand growth for 2015 and beyond.
While silver prices may not surge immediately, the time appears right for prices to start to build a base as long term fundamentals begin to shift. That being said, the longer term risk of a breakout now appears to be on the upside of Silver. Therefore, selling deep out of the money silver puts appears to be a high percentage play at this time.
The July 13.00 puts should be good options to sell on the next pullback in silver prices (look to take at least $400 on the premium). More conservative traders can target the September 11.00 puts for similar premium. Both should get steady decay on a steady to moderate upswing in silver prices.
I hope this helps you take some premium this month. We’ll be working closely with our clients in positioning in the white metals over the next 4-6 weeks.
I’ll also be talking about Silver and our positioning strategy in our next Video Market Update, available on the blog next Monday (April 6).
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James Cordier is the author of McGraw-Hill’s The Complete Guide to Option Selling, 1st, 2nd and 3rd Editions. He is also founder and president of OptionSellers.com, an investment firm specializing in writing commodities options for high net-worth investors. James’ market comments are published by several international financial publications and news services including The Wall Street Journal, Reuters World News, Forbes, Bloomberg Television News and CNBC. Mr. Cordier’s book, The Complete Guide to Option Selling 3rd Edition (McGraw-Hill 2014) is available at bookstores and online retailers now.
***The information in this article has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Use it at your own risk. There is risk of loss in all trading. Past performance is not necessarily indicative of future results. Traders should read The Option Disclosure Statement before trading options and should understand the risks in option trading, including the fact that any time an option is sold, there is an unlimited risk of loss, and when an option is purchased, the entire premium is at risk. In addition, any time an option is purchased or sold, transaction costs including brokerage and exchange fees are at risk. No representation is made that any account is likely to achieve profits or losses similar to those shown, or in any amount. An account may experience different results depending on factors such as timing of trades and account size. Before trading, one should be aware that with the potential for profits, there is also potential for losses, which may be very large. All opinions expressed are current opinions and are subject to change without notice.