Gold/Silver Spread: Waiting for a New Setup to Add

Quick Turnaround

You may recall that the blog entered both the initial position and the ‘add-on’ position in the June-July gold (100 oz.)/silver (x8,000/oz.) spread on St. Patrick’s Day.  The entry price for both of the positions was at approximately -$1,890 (premium silver).

The ‘add-on’ position had a short leash as we risked to a two-consecutive day close above ‘even money’.

As it turns out, the ‘add-on’ position also had a very short lifespan!  The position was liquidated at +$462 (premium gold) on March 24th.  This resulted in a loss of -$2,352 on the trade.

Strategy

Given the whiplash of the last couple of weeks, we are going to observe the spread’s price action before issuing reentry criteria for an ‘add-on’ position.

Gold (100 oz.) Silver (8,000 oz.) spread (75-bar MA) weekly

Gold (100 oz.) Silver (8,000 oz.) spread weekly (with a 75-bar MA)

Ideally, we will find some sort of setup after the March low has been breached…but before the spread makes an end-of-week close below the rising weekly 75-bar Moving Average for the first time since January 2013.  We hope to be getting into a second ‘add-on’ position (the third short sale) around that time.

Given the fact that our minimum expectation for the gold (100 oz.)/silver (x8,000/oz.) spread is a decline to something in the neighborhood of -$80,000 (premium silver), we should have plenty of opportunity between here and there to increase the position size.

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Bund/BOBL spread: In a Ticklish Spot

European Yield Curve

European debt has been racing higher since last summer.  The move has been fueled by a global stock market correction and continued economic stimulus measures (interest rate cuts and bond buying) from the European Central Bank.

This seems to be par for the course.  European debt has been posting record highs for years.

However, the spread between the European 10-year and 5-year notes (bunds and BOBLs) is now in a pretty interesting position.  From a technical standpoint, a setup on the short side of the spread has materialized.

Reading the Charts

In the second half of January, the June Bund/BOBL spread cleared resistance between the similar October and November highs.  This catapulted it nearly four points higher into the Leap Day (February 29th) peak, which marks the current contract high.

The spread pulled back into a March 15th low of 30.61, which is just two ticks under the mid-February pullback low of 30.63.  It has since recovered more than half of the pullback.

June Bund BOBL spread daily

June Bund BOBL spread daily

Now here’s where it gets interesting…

On the weekly timeframe, the 2015 high was established eleven months ago at 30.58.  The spread then plunged about nine and a half points from there.

So the April 2015 peak became a major price resistance level.

The nearest-futures spread bottomed out last summer and started running higher.  It finally cleared the 2015 weekly high in late January.  Once it was surpassed, this resistance level became a new support level.

Bund BOBL spread (nearest-futures) weekly

Bund BOBL spread (nearest-futures) weekly

Support at the 2015 weekly high of 30.58 seems to be holding.  The pullbacks in mid-February and mid-March attest to this.  It means the Bund/BOBL spread is still clearly in a bull market.  The sky is the limit.

However…

A clean break back below the March 15th low of 30.61 and the 2015 weekly high of 30.58 would indicate that the breakout has failed!  It would be a failure on two timeframes, which could lead to a sizable decline.

Although it may not make fundamental sense to short the Bund/BOBL spread, it would certainly make technical sense.  And since everyone and their mother seem to favor the long side of European treasuries, a big enough price break is likely to trigger massive program-selling.  This could crush the spread.

That’s a good enough reason for us to take the trade.

Trade Strategy:

For tracking purposes, the blog will make a hypothetical trade by selling one June Euro bund contract and simultaneously buying one June Euro BOBL contract if the spread closes below 30.58.  Initially, the spread will be liquidated on a two-consecutive day close 10 ticks above the contract high that precedes the entry (currently at 32.34). 

Gold/Silver Spread: Back In the Saddle

Luck of the Irish

The IMC blog was working two hypothetical orders to short the June-July gold (100 oz.)/silver (x8,000/oz.) spread.  The initial order was to enter on a close below ‘even money’ and the second ‘add-on’ order was to enter on a close below the rising 50-day Moving Average.

Thanks to Murphy’s Law, they both got filled on St. Patrick’s Day as the spread plunged nearly $3,000 in a day!

Both the initial position and the ‘add-on’ position were entered at approximately -$1,890 (premium silver) when the blog sold one 100 oz. June gold contract at approximately $1,266.30 (a value of $126,630) and simultaneously bought one 5,000 oz. July silver contract and three 1,000/oz. July ‘mini’ silver futures contracts at approximately $16.065 (a total value of $128,520) for each spread.

The initial position will be exited on a on a two-consecutive day close above +$5,000 (premium gold).

The ‘add-on’ position will be exited on a on a two-consecutive day close above ‘even money’.

Signs of a Turn

After three consecutive weeks of gold closing with the premium on this spread, maybe the St. Paddy’s Day breakdown is the beginning of the end.  After all, the sustained gold premium in the spread was longer than anything we saw during the financial crisis.

Also, the June-July gold (100 oz.)/silver (x8,000/oz.) spread closed back below the 50-day MA for the first time in over four months.  This signaled a bearish trend change as well.

June-July Gold (100 oz.) Silver (8,000 oz.) spread (50-day MA) daily

June-July Gold (100 oz.) Silver (8,000 oz.) spread (50-day MA) daily

If it can maintain a downward trajectory, the spread and the ratio could eventually tangle with major technical support at the rising weekly 75-bar Moving Average.  An end-of-week close below this level for the first time in over three years should provide macro confirmation of the new bear market.

A Long Road Ahead

In the featured article on the gold/silver ratio, you may recall that we examined data for both the spread and the ratio to come up with a minimum downside target for the gold (100 oz.)/silver (x8,000/oz.) spread to be somewhere around -$80,000 (premium silver).  It could be even lower.

In light of this macro target, we are likely to see plenty of setups along the way to build up a sizable position.  This means that you don’t have to take unreasonable risk or ‘bet the farm’ in order to make big returns if our scenario plays out.  We will continue to address this spread and point out additional setups as the move progresses.

Copper(x2)/Gold Spread: Still a Screaming Bargain!

Still Underwater

We have been stalking the spread between copper and gold for a signal to get long.

With the exception of a two-day excursion on the last two days of 2015, the value of two copper contracts has been priced at a discount to the value of one gold contract for the last four months. That’s about how long the inversion lasted during the depths of the financial crisis between late 2008 and the first quarter of 2009.

If this carries on a few more weeks, it will be the longest inversion since the mid-1980s.

Deep Dive

Back on February 11th, the nearest-futures copper(x2)/gold spread hit a multi-year low of -$24,465 (premium gold). This put it within striking distance of the all-time low from 2009 at -$29,380 (premium gold).

Furthermore, the ratio between the value of one 25,000 lb. copper contract and one 100 oz. gold contract also hit a new multi-year low of 0.40:1.

Both the spread and the ratio have been on the rebound for the last month. However, it has not yet signaled a trend change and given us the green light to get long.

If the rally fizzles out and the ratio heads even lower to return to the financial crisis low of 0.35:1, we will likely adjust our spread position composition to trading three copper contracts for every one gold contract. This would be done to normalize the position.

We certainly hope that we get the chance to do this! After all, the copper/gold ratio has only been as low as 0.35:1 three times in the last four decades.

Each time turned out to be a phenomenal buying opportunity.

Trigger Point

Currently, for our signal to get back in on the long side of the copper(x2)/gold spread, we are waiting for a two-day close above the declining 100-day Moving Average. It’s now been nine months since that last happened.

Sep-Aug Copper (x2) Gold spread daily

Sep-Aug Copper (x2) Gold spread daily

The last three bounces ended in early September, early November, and late December…just as the spread was nearing the 100-day MA. So a two-day close above the 100-day MA would be a very constructive event.

Since we’re now in the middle of March, we are going to start following the later-dated futures contracts for our trade. We’ve decided on the September copper and August gold contracts. The difference between the Sep-Aug spread and the May-June spread is not that much in the grand scheme of things, so we’re going to take advantage of it.

Trade Strategy:

Cancel the hypothetical order for the May-June copper(x2)/gold spread and place a new order to buy two September copper contracts and simultaneously sell one August gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA (currently around -$6,625). Initially, the spread should be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry.

Gasoline/Crude Oil Spread: Roll from Spring to Summer

Buying More Time

The IMC blog entered a hypothetical short position in the April RBOB gasoline/crude oil spread at $21.59 (premium gasoline) on January 15th.

Over the last two months, the spread has dropped as low as $17.57 and rebounded as high as $23.47.

The ratio between April RBOB gasoline and April crude oil was at 1.69:1 when we entered the spread. Here we are two months later and the ratio is at 1.63:1. It hasn’t changed much.

Now remember, history shows that gasoline is just too expensive whenever the ratio is at 1.4:1 or higher (basis the nearest-futures ratio). So we still like the short side of this trade.

RBOB Gasoline Crude Oil ratio (nearest-futures) monthly

RBOB Gasoline Crude Oil ratio (nearest-futures) monthly

But with the expiration of the April crude oil contract right around the corner, we’re going to have to roll the position into longer-dated contracts.

Thinking About Summer

Spring starts in just a few days!

So we’re going to roll into a summer spread.

Hey, there’s a reason this is called the futures market…

July 2016 RBOB Gasoline Crude Oil spread daily

July 2016 RBOB Gasoline Crude Oil spread daily

The July RBOB gasoline/crude oil spread is currently trading at a discount of about $1.75 to the April spread. Perhaps this is due to the seasonal tendency for the spread to peak in the spring.

However, the July ratio is still at a historically high level of 1.52:1. On its own merit, that makes the July spread a short sale candidate.

Additionally, the July RBOB gasoline/crude oil ratio has nearly completed a Fibonacci .618 retracement of the decline between the January contract high and the February correction low. This is an ideal technical level to get short.

July 2016 RBOB Gasoline Crude Oil ratio daily

July 2016 RBOB Gasoline Crude Oil ratio daily

We’re gonna roll to the July spread here. Once we get a confirmed downtrend and the right setup, we hope to add to the position. We will keep you posted…

Trade Strategy:

For tracking purposes, the blog will liquidate the short position in the April RBOB gasoline/crude oil spread and simultaneously enter a short position in the July RBOB gasoline/crude oil spread at the market-on-close on Tuesday, March 15th. Risk a two-consecutive day close above $23.00.

Platinum/Gold spread: Let’s Roll!

Where We Stand

The IMC blog is holding an investment position in the April the platinum/gold spread from the equivalent of -$199.90 (premium gold). Initially, it was bankrolled with $113,000.

At the end of December, we doubled up on the position. Just a few days later, we liquidated the ‘add-on’ position with a loss.

This leaves us in the initial spread position, but the loss caused our bankroll to drop to $107,560.

Beat the Clock

The First Notice Day for the April metals contracts is at the end of the month. It’s still a couple of weeks out, but we’re going to go ahead and roll to the summer contracts now.

We are now going to get positioned into the July-August platinum/gold spread. That way, we don’t have to worry about rolling again until we reach the midpoint of the year.

The ‘Add-On’ Parameters

The spread clipped the 100-day MA on December 31st, but it was a one-day wonder that marked the end of a sucker’s rally.

Once the New Year began, the spread wasted no time heading to new multi-year lows and new record lows followed.

The nearest-futures platinum/gold ratio hit a multi-decade low of 0.74:1 on January 20th. This is within close striking distance of the record low of 0.69:1, which was set back in October 1982.

We know this spread –and its ratio- is ridiculously cheap. But Keynes warned us a long time ago that “The market can stay irrational longer than you can stay solvent.” This certainly applies to the relationship between the platinum and gold markets!

Platinum Gold spread (nearest-futures) daily with the 100-day MA

Platinum Gold spread (nearest-futures) daily with 100-day MA

To double up again, we’d like to see the platinum/gold spread make a two-day close above the declining 100-day Moving Average for the first time since the summer of 2014. We’re waiting for the same trigger point to reenter a speculative long position as well.

If we continue to manage risk -meaning that we use proper position-sizing and not getting over-leveraged- the platinum/gold spread will eventually reward our efforts. Keep the faith.

Investment Strategy:

For tracking purposes, the blog will liquidate the long April platinum/gold spread investment position and simultaneously enter a long investment position in the July-August platinum/gold spread at the market-on-close on Tuesday, March 15th. Currently, there are no liquidation parameters for this low-leverage position. It is being bankrolled with $107,560.

Also, double the position size of the investment if the July-August platinum/gold spread makes a two-day close above the declining 100-day MA (currently around -$231.00). If filled, liquidate the ‘add-on’ position if the spread makes a two-day close below the 100-day MA.

Speculative Strategy:

Cancel the orders to buy the April platinum/gold spread and replace it with the following:

Buy two 50/oz. July platinum futures contracts and simultaneously sell one 100 oz. August gold contract if the spread makes a two-day close above the declining 100-day MA (currently around -$231.00). If filled, exit on a two-consecutive day close $5/oz. below the contract low that precedes the entry.

US Treasury Spreads: We’re Short For the Long Decline

The Big Bond Break?

The IMC blog initiated a couple of short positions on the yield curve yesterday. We shorted the 30-year bonds against the 10-year notes and we shorted the 10-year notes against the 5-year notes.

The short June T-bond/T-note spread was entered at 32-24. We are initially risking this spread to a two-day close above 35-19.

The short June T-note/5-Year note spread was entered at 9-03.5. We are initially risking this spread to a two-day close above 10-06.

June T-note 5-year note spread daily

June T-note 5-year note spread daily

Both spreads broke their mid-February lows, resulting in a lower correction low after a preceding bounce to a lower high. A lower high, followed by a lower low, is what we’d expect in a downtrend. Hopefully, this is the start of it.

Making It Complicated

As we pointed out at the end of the last post, a trader would not actually have both spreads on because the LONG 10-year in the first spread and the SHORT 10-year in the second spread would offset each other. This would simply leave you short the 30-year bond and long the 5-year note.

Although we are running both spreads for hypothetical purposes, a trader should focus on the one that best fits their own risk profile. The further out on the curve, the higher the volatility. So the T-bond/T-note spread is going to be more volatile than the T-note/5-Year note spread.

Now in the event that you want both spreads for diversification, you could short the T-bond and buy the 5-Year note. If one spread triggers the exit criteria but not the other, close out the contract that should have been exited (either the T-bond or the 5-Year note) and then put the T-note contract on to complete the remaining spread. Capisce?

Because We’re Optimists

Perhaps we’ve just entered the start of a big decline. If so, we’re going to want to squeeze all we can out of it. Therefore, we will need to find a spot to add to the short positions.

To recommend the ‘add-on’ positions, we’d like to see some setups where the spreads fall a bit, make a countertrend bounce that peaks either side of the initial entries, and the drops to new lows for the move.

If we’re lucky enough to see events unfold this way, we can move the initial liquidation parameters down to either side of the entry prices. This serves to eliminate most of the initial trade risk.

Another consideration is the use of price intervals where more spreads are sold in incrementally lower prices. The intervals would be based on the size of the countertrend moves as a proxy for volatility. We’ll cross that bridge if we come to it. For now, let’s just cheer for a drop in the Treasury market and pray that we get though Friday’s big unemployment report unscathed.

Gold/Silver Spread: In and Out. Let’s Go Again!

Leaping Out

On February 18th the IMC blog entered a hypothetical short position in the June-July gold (100 oz.)/silver (x8,000/oz.) spread at approximately -$1,500 (premium silver).

On Leap Day (February 29th) the position was liquidated at +$3,926 (premium gold), since the spread closed above +$500 for four consecutive days. This resulted in a loss of approximately -$5,426 on the first go-around.

Leaping Back In

The spread has now closed with the premium on gold for six days in a row. This beats the 2008 Financial Crisis streak of five consecutive days with a gold premium.

Gold Silver ratio daily

Gold Silver ratio daily

In addition, the gold/silver ratio reached a multi-year high of 83:1. This puts it right near the October 2008 thirteen-year peak of 84.7:1 and slightly beyond the 2003 peak of 82:1.

Despite the loss taken on the initial short sale attempt, the rubber band is still stretched to a historical breaking point. If the gold (100 oz.)/silver (x8,000/oz.) spread dips back under the ‘even money’ mark –which is a ratio of 80:1- then it still makes sense to keep chipping away at the short side. So go ahead and strap yourself in, because that’s what we’re gonna do.

June-July Gold (100 oz.) Silver (8,000 oz.) spread daily

June-July Gold (100 oz.) Silver (8,000 oz.) spread daily

What’s It Telling Us?

On another note, the gold market is in an interesting position right now. Not only did it trigger a bullish trend change this year and potentially end the multi-year bear market, but it’s also historically overpriced relative to silver, platinum, copper, and even ‘black gold’ i.e. crude oil. Something’s gotta give.

The $64,000 question is: Is gold’s trend change a canary in the coalmine telling us that other precious metals, industrial metals, and energy markets are going to end their bear markets as well…or is the breakout in gold unsustainable because it is so far unconfirmed by the other markets mentioned?

Good thing we’re spread traders. We don’t have to know the answer to that question. We merely bet on the revision to the mean!

Trade Strategy:

The Reentry

For tracking purposes, the blog will make a hypothetical trade by selling one 100 oz. June gold contract and simultaneously buying one 5,000 oz. July silver contract and three 1,000/oz. July ‘mini’ silver futures contracts on a close below ‘even money’. Initially, the spread will be liquidated on a two-consecutive day close above the contract high that precedes the entry (currently +$4,862).

The ‘Add-On’

Additionally, the blog will make a hypothetical trade by selling one 100 oz. June gold contract and simultaneously buying one 5,000 oz. July silver contract and three 1,000/oz. July ‘mini’ silver futures contracts if the spread closes below the rising 50-day MA (currently around -$2,513). Initially, the ‘add-on’ spread will be liquidated on a three-consecutive day close above ‘even money’.