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.

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