Gold/Silver Spread: The Reentry Signal Was Triggered

Gold/Silver Spread

Yesterday the IMC blog made a hypothetical reentry on the short side of the April-March gold/silver (x7,000/oz.) spread when it made a two-day close below the rising 60-day Moving Average for the first time since the start of August. The position was created by selling one 100 oz. April gold contract at approximately $1,235.40 (a value of $123,540) and simultaneously buying one 5,000 oz. March silver contract and two 1,000/oz. March ‘mini’ silver futures contracts at approximately $16.99 (a total value of $118,930). This initiates a short spread position at approximately +$4,610 (premium gold). The initial liquidation trigger is a two-consecutive day close above +$9,800, which is approximately $500 above the current contract closing high.

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

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

Wouldn’t you just know it, the gold/silver spread spiked higher today during all the market chaos as Switzerland stunned the world by breaking the peg between the Swiss franc and the Euro currency.  They also cut interest rates on certain sight deposit accounts from a negative 0.25% to a negative 0.75%. The reactions in the markets were seismic as the Swiss franc spiked nearly 27% against the US dollar at one point and the Swiss Market Index plunged as much as 14%. This was the biggest decline that the Swiss stock market has experienced since 1988! There’s gotta be more than a few traders who are annoyed that the Swiss National Bank said on Tuesday that their currency peg was a “pillar of policy” and then completely abandoned that policy 48 hours later. It will be interesting to see how many hedge funds suffered major losses from today’s actions. Perhaps a few will even tap out.

The surprise for us today was that the gold/silver spread did not drop. Precious metals gained on safe-haven buying. Normally, the gold/silver spread will decline when metals move higher, but the gold market substantially outperformed silver. Of course, this was just a one-day move. We’ll see how it plays out over the next several days. Silver is currently banging against resistance between the declining 100-day Moving Average and the December high, so a strong close above this level could allow it to catch up with the gold market and crush the April-March gold/silver (x7,000/oz.) spread. Our fingers are crossed!

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