Gold/Silver Spread: Exit And Reentry Setup

Gold/Silver Spread

On November 25th The IMC blog initiated a hypothetical trade by selling one 100 oz. February gold contract at approximately $1,197.80 (a value of $119,780) and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts at approximately $16.61 (a total value of $116,270). This established a short spread position at approximately +$3,510 (premium gold).

The exit strategy was to liquidate on a two-consecutive day close above +$7,200. The exit was triggered on December 17th when the spread closed at +$7,954. This represented a hypothetical loss of -$4,444 on the position.

Last week’s weakness in the precious metals allowed the February-March 100-ounce gold/7,000-ounce silver spread to push briefly beyond the November 28th top. Unless a reversal materializes, the spread currently has no price resistance at this point until the 2008 all-time high of +$13,519.

February Gold March Silver (7,000 oz.) spread daily

February Gold March Silver (7,000 oz.) spread daily

On December 9th the February-March gold/silver (x7,000/oz.) spread broke a prior month’s low for the first time since July and altered the bearish price structure. It also closed below the rising 50-day Moving Average for the first time since the start of August. This indicated that the trend has turned bearish. Last week’s breakout to new highs negated the trend change signal. However, a close below the December 10th multi-week correction low of +$2,631 should get the spread back on track with the bear trend. This would be reason to get right back in on the short side.

Trade Reentry Strategy:

For tracking purposes, the blog will make a hypothetical trade by selling one 100 oz. February gold contract and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts if the spread makes a two-day close below the rising 50-day MA (currently around +$4,550) or a one-day close below the December 10th low of +$2,631, whichever occurs first. Initially, the spread will be liquidated on a two-consecutive day close $500 above the contract high that precedes the entry signal (currently at +$9,166).

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