Gold/Silver Spread: Roll To the Summer Contracts

Gold/Silver Spread

This Friday is the last trading day of February and the First Notice Day for the March silver futures contracts. Since our short April-March gold/silver (x7,000/oz.) spread is on the long side of the silver contracts, they need to be rolled over. Heck, as long as we’re doing a rollover let’s go ahead and roll our gold contracts, too. Then we don’t have to worry about rollovers in the metal contracts again until Memorial Day.

June-July Gold Silver (7,000 oz.) spread daily

June-July Gold Silver (7,000 oz.) spread daily

After surging to a multi-year high at the end of 2014, the gold/silver (x7,000/oz.) spread has become range-bound. Since early November the June-July gold/silver (x7,000/oz.) spread has basically been flip-flopping back and forth over the +$5k mark. It even formed a small double top between the December 16th high of +$8,922 and the December 31st high of +$8,906 . This sets near-term resistance. On the flip side, the January low of +$868 and the current February low of +$1,172 sets near-term price support.

We do not know which way the inevitable breakout will occur. A breakout to new highs could catapult the June-July gold/silver (x7,000/oz.) spread to the 2008 all-time high of +$13,519, while a clean break below the January/February lows could slam the spread to last summer’s low of -$17,500. What we do know is the history of this spread. Over the last few decades, the value of the 100 oz. April gold contract rarely keeps a premium over the value of 7,000/oz. of silver.

We also know that the last couple of times the gold/silver ratio has reached 75:1 or higher, it reversed and sank to 46:1 (in 2006) and 32:1 (in 2011). The bear markets after the reversals lasted three and a half years (from the 2003 top) and two and a half years (from the 2008 top).

Gold Silver ratio weekly

Gold Silver ratio weekly

With the nearest-futures gold/silver ratio has hitting a nearly four-year high of 75:1 back in November and the rally stalling out and with the gold market signaling a bullish trade change on the long-term charts at the end of last year, the time seemed right to start probing the short side of the gold/silver (x7,000/oz.) spread.

Trade Strategy:

For the short April-March gold/silver (x7,000/oz.) spread entered at the equivalent of approximately +$4,610 (premium gold) on January 14th, roll the one short 100 oz. April gold contract to the June contract and roll the one long 5,000 oz. March silver contract and two long 1,000/oz. March ‘mini’ silver futures contracts to the July contracts at the market-on-close on Wednesday, February 25th. Risk the short June-July gold/silver (x7,000/oz.) spread to a two-consecutive day close above +$9k.

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