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’.

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