Gold/Silver Spread: Back To the Whipping Post?!

Gold/Silver Spread

On June 11th, The IMC blog initiated a hypothetical short position in the December gold/silver (x7,000/oz.) spread (short a 100 oz. gold contract, long a 5,000 oz. silver contract, and long two 1,000/oz. ‘mini’ silver contracts) at +$7k (premium gold). We were risking a two-consecutive day close above +$9k.

The liquidation parameter was triggered yesterday when the spread closed at +$10,082 (premium gold). This resulted in a hypothetical loss of -$3,082 on the position.

Do-or-Die

The two-day close above the December 16th contract high cleared the way for a return to the 2008 all-time high of +$13,519. This is why we abandoned the short position. However, a two-day close back under the $8k level could indicate that the breakout has failed. If so, the December 100-ounce gold/7,000-ounce silver spread could set sail for the ‘even money’ mark again. This would be a legitimate reason to get back in on the short side.

December Gold Silver (7,000 oz.) spread daily

December Gold Silver (7,000 oz.) spread daily

The declines from the November, December, March, and April peaks were all followed by lower corrective lows. Therefore, it would not be out of the question for a reversal in the December gold/silver (x7,000/oz.) spread to drag it all the way back down to the May 18th multi-month low of -$1,679 in the next few months.

Trade Reentry Strategy:

For tracking purposes, the blog will work a hypothetical order to sell one 100 oz. December gold contract and simultaneously buy one 5,000 oz. December silver contract and buy two 1,000/oz. December ‘mini’ silver futures contracts if the spread closes below +$8k (premium gold). Initially, the spread will be liquidated on a two-consecutive day close $500 above the contract high that precedes the entry (currently at +$10,336).

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