Gold/Silver Spread: The Next Big Move?

A Personal Note

Readers may have noticed that posts on the IMC blog have been sparse as of late.  This has been due to time constraints as I’ve been juggling several projects, including a potential launch of an RIA.  (As you would probably guess, the firm will be considered an “active manager” of assets.)  

This may or may not impact how I’m allowed to continue blogging on the subject of spread trading in the futures markets.  Until then, I will try to make a few posts on some current opportunities.  Should anything change because of the RIA business, I will keep you updated.

Tip of the Iceberg

Last year, the gold/silver ratio clipped the double top that was established just above 80:1 in 2003 and 2008.  It then rolled over and triggered a Wash & Rinse sell signal.  Based on historical precedent, I provided an argument for why I expected this to be the start of a wicked decline that could ultimately send the ratio below 50:1.

Gold Silver ratio monthly

Gold Silver ratio monthly

This outlook for a decline in the gold/silver ratio was intrinsically a bullish outlook for precious metals.

The ratio bottomed a little below 66:1 last summer, went into a messy trading range for several months, and finally made a sizable bounce from late March into early May.  It never came close to the downside target I was and am expecting.

Here’s what recently caught my attention: the early May multi-month high of nearly 76:1 just happened to be right near the Fibonacci .618 retracement of the entire decline from the March 2016 twenty-one year high to the July 2016 multi-month low.  It also coincides with the bounce high from last May.

Gold Silver ratio daily

Gold Silver ratio daily

After tagging this resistance area three weeks ago, the gold/silver ratio has been backing down.

Based on the fact that the initial downside objective of 50:1 or lower has not been achieved and the fact that the ratio rolled over after hitting resistance, I can’t help but think this could be the start of another sizable down move…maybe even the one that finally takes it to 50:1.

Backed By the Buck

Remember, a drop in the gold/silver ratio usually means that precious metals are on the upswing.  This is because silver tends to move faster than gold.  When the ratio rises (like over the last few months), it is because silver is dropping faster than the gold.  Conversely, when the ratio drops, it is because silver is moving up at a faster rate than gold.

Many people know that there often tends to be an inverse relationship between precious metals and the US dollar.  Therefore, a decline in the greenback should be supportive of an increase in the price of precious metals and, by extension, a drop in the gold/silver ratio.

As it turns out, there is mounting evidence that the greenback is on the downswing.  This is supportive of the idea that the gold/silver ratio should be heading lower from here.  I will shortly be publishing a post on Martin Kronicle that lays out the reasons that the US dollar has peaked.  In broad strokes, though, it’s due to monetary policy, cycles/seasonal patterns, and recent price behavior.

US Dollar index daily

US Dollar index daily

Let me also state for the record that I am not a gold bug.  I am a gold bull when prices are moving higher and I am a gold bear when prices are moving lower.  My only intent is to be positioned on the right side of the trend in precious metals.  As famous speculator Jesse Livermore said, “There is only one side of the market and it is not the bull side or the bear side, but the right side.”

Trading the Spread

The December gold/silver ratio closed a little below 73:1 on Friday.  Currently, the closest that a trader can get to creating a ‘dollar neutral’ spread position in the futures market is to trade 100 ounces of gold against 7,000 ounces of silver.  This can be accomplished by shorting one 100 oz. gold futures contract, buying one 5,000 oz. silver futures contract, and buying two 1,000 oz. ‘mini’ silver futures contracts.

Not surprisingly, the price chart for the December gold (100 oz.)/silver (x7,000/oz.) spread looks very similar to the chart of the gold/silver ratio in that it recently hit an eleven-month high, clipped the major Fibonacci .618 resistance line, and then rolled over.  Technically, this appears to be a good reason to take a shot at the short side of the trade.

December Gold (100 oz) Silver (7,000 oz) spread daily

December Gold (100 oz) Silver (7,000 oz) spread daily

The midpoint of the current pullback is at +$6,520 (premium gold).  That’s nearly $2,500 from the current pullback low.  Since the prior bounce off the May 16th low was $2,141, getting a bounce to the current midpoint doesn’t seem all that difficult.  Therefore, a bounce to +$6k is not an unreasonable expectation.

The May multi-month high of +$8,982 is near-term resistance.  Shorting a bounce to +$6k and exiting on a two-day close above +$9k seems like a logical play.  If so, it would set an initial risk expectation of somewhere in the neighborhood of $3,000.

It is important to keep in mind, however, that this isn’t a guaranteed cap on the risk because we have no idea how far above +$9k the spread could close if it moves adversely.  But we can at least use it to give us some sort of rough estimation of the reward-to-risk profile on the trade.

If our thesis is correct, the spread should not have any problem returning to the 2016 low of -$9,315 (premium silver).  This is the minimum downside expectation.  Shorting at +$6k with an initial risk of approximately $3,000 on the trade puts the reward-to-risk ratio at 5-to-1 if the minimum downside expectation is met.

But a ratio of 50:1 (our minimum macro projection) implies that the gold (100 oz.)/silver (x7,000/oz.) spread would be priced somewhere between -$35,000 and -$51,000 (premium silver).  With that sort of price target, the initial risk of approximately $3,000 sets the reward-to-risk ratio on the trade somewhere between nearly 14-to-1 and 19-to-1.

On the one hand, the reward-to-risk may be a little overstated since we cannot ascertain the exact risk on the initial trade.  On the other hand, we didn’t do any projections on the impact that pyramiding would have if we add to the position if the trend unfolds in our favor.  That seems like a fair trade-off to me.

As a speculator, this kind of a potential payoff seems like a pretty smart bet.

Trade Strategy:

Place a hypothetical order to sell one December 100 oz. gold futures contract, buy one 5,000 oz. silver futures contract, and buy two 1,000 oz. silver futures contracts if the December gold (100 oz.)/silver (x7,000/oz.) spread closes at +$6,000 (premium gold) or higher.  Initially, liquidate the position on a two consecutive day close above +$9,000 (premium gold).   

Gold/Silver Spread: Go On, Take the Money and Run!

Book ‘Em, Danno!

The IMC blog is holding a hypothetical short position in the June-July gold (100 oz.)/silver (x8,000/oz.) spread.  It was entered at approximately -$1,890 (premium silver) on St. Patrick’s Day.

At the end of April, the spread nearly matched the multi-month correction low that was established on October 7th.  This was a key support level, so a bounce could be expected.

Gold (100 oz.) Silver (8,000 oz.) spread (nearest-futures) daily

Gold (100 oz.) Silver (8,000 oz.) spread (nearest-futures) daily

The spread bounced, of course.  But the problem is that it has continued to bounce.  If it was a simple bear market rally the spread should have turned over a few days later.  This bounce has lasted for nearly a month now.

Furthermore, the gold (100 oz.)/silver (x8,000/oz.) spread closed below the rising weekly 75-bar Moving Average for the first time in over three years when the month began.  This should have been an acceleration catalyst.  Instead, the spread closed back above the weekly 75-bar MA last week.

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

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

Since the blog is positioned on the short side of the spread, the price action over the last few weeks is a concern.

Where’s It End?

Currently, a Fibonacci .618 retracement of the entire decline from the March 1st multi-year high would send the June-July gold (100 oz.)/silver (x8,000/oz.) spread up to -$2,368 (premium silver).  This level would be confluent with the March 21st correction low of -$2,486.  Remember the old technical rule here: Old price support, once it has been broken, becomes new price resistance.

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

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

Now, just because the spread might make it to this resistance level, it doesn’t mean that it is obligated to stop there.  The spread’s been above ‘even money’ before.  Our approach is to react to how the spread behaves at support/resistance levels, not predict how it will behave.

A Golden Sign

A lot of times, the gold/silver spread will trend in the same direction as the underlying metals themselves.  Silver usually moves at a faster clip than gold.  So the gold/silver usually drops when metals rally because silver is moving up faster than gold.  Conversely, the gold/silver usually rallies when metals drop because silver is moving down faster than gold.

In light of this relationship, it can be illuminating to see what the underlying gold and silver markets are doing.

After a multi-year bear market ripped nearly half of the value off the yellow metal, gold staged a huge bull run off the December low.  As a matter of fact, gold started the year with its best quarterly gain –up a whopping 16.4%- since 1986.  A month later, the market was up 22% and hitting the psychological $1,300/oz. level for the first time since January 2015.   This could very well be the start of a new bull market.

But

Markets don’t go all the way up in a straight line.  Well, unless you’re short on margin and don’t have any protective stops or hedges in place.  But Murphy’s Law is a topic for another post, though.

It appears that gold could have finished a first leg higher and is just starting a correction.  Consider the market’s behavior on three timeframes:

On the daily chart, gold hit a short-term peak of $1,287.80 on March 11th.  It then recovered and cleared the March peak at the end of April/start of May.  This only lasted a couple of days and gold slipped back under the March high.  This is appears to be a failed breakout attempt.

Gold (nearest-futures) daily

Gold (nearest-futures) daily

Furthermore, gold pulled back to technical support at the rising 50-day Moving Average a few times in April. It recovered each time.  Today, however, the market is poised to close well below the 50-day MA.

On the weekly chart, gold nearly matched price resistance at the January 2015 top at $1,307.00 at the beginning of the month.  It failed to clear it and has now posted lower weekly lows for three weeks in a row.

Gold (nearest-futures) weekly

Gold (nearest-futures) weekly

On the monthly chart, gold has made higher monthly highs for five consecutive months.  That’s quite a stretch!  Gold has not done this since the end of 2010.  The same thing happened in late 2009 as well.  Breaks to three and four-month lows followed.

Gold (nearest-futures) monthly

Gold (nearest-futures) monthly

As an added bonus, the US dollar undercut the August 2015 correction low at the start of the month and quickly reversed higher.  This Wash & Rinse buy signal is bullish.  The reversal had momentum because the buck is now even above last month’s high.  This created an ‘outside bar’ with an upward reversal on the monthly timeframe.  Since the greenback and gold have a strong inverse relationship, meaning they usually trend in opposite directions, then the recent bullish behavior in the dollar will most likely be a stiff headwind for gold prices.

US Dollar Index (cash) daily

US Dollar Index (cash) daily

All that leads to the conclusion that the gold/silver spread could see significantly more upside over the near-term.

Here’s the Plan, Stan

Near-term, the spread looks poised for more upside.  So it makes sense to cover the position.  Longer-term, however, our studies of the spread and the ratio have led us to believe that the gold (100 oz.)/silver (x8,000/oz.) spread could see a minimum downside target of somewhere around -$80,000 (premium silver) over the coming months and years.

So we’ll do both.  Right now, we’ll exit stage right and take a quick profit.  (Don’t forget, though, that today’s profit will be slightly offset by the ‘add-on’ spread that we took a -$2,352 hit on back in March).  Then we’ll watch the price action closely from the sidelines and look for a setup to reenter a short spread position.

Trade Strategy:

On the hypothetical short position in the June-July gold (100 oz.)/silver (x8,000/oz.) spread entered at -$1,890 (premium silver) on March 17th, exit at the market-on-close on Tuesday, May 24th.  

 

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.

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.

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’.

Gold/Silver Spread: Add On Bearish Confirmation

A Hat In the Ring

On February 18th the IMC blog entered a hypothetical short position in the June-July gold (100 oz.)/silver (x8,000/oz.) spread when it sold one 100 oz. June gold contract at approximately $1,225.80 (a value of $122,580) and simultaneously bought one 5,000 oz. July silver contract and three 1,000/oz. July ‘mini’ silver futures contracts at approximately $15.51 (a total value of $124,080). This initiates a short spread position at approximately -$1,500 (premium silver).

The initial liquidation trigger is a four-consecutive day close above +$500 (premium gold), which puts it above the 2015 multi-year peak of +$132, basis the nearest-futures contracts.

Looking To Add

The spread posted a new high on Friday. This slightly eclipsed the August high. A nice pullback this week would indicate that a Wash & Rinse pattern has been triggered. This would certainly be a good confirmation for the short position.

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

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

We are also running a contingency to add another spread on a close below the rising 50-day Moving Average, which is currently around -$3,849. A clean break below the 50-day MA for the first time since early November would signal a bearish trend change.

More Technical Confirmation

Once the June-July gold (100 oz.)/silver (x8,000/oz.) spread has broken the 50-day MA, we will be cheering for a break of a prior month’s low. This has not happened since October. Such an event would alter the price structure, further confirming our expectations for a bearish trend change.

Gold (100 oz.) Silver (8,000 oz.) spread weekly

Gold (100 oz.) Silver (8,000 oz.) spread weekly

Finally, an end-of-week close below the rising weekly 75-bar Moving Average (currently around -$9,170) in the gold (100 oz.)/silver (x8,000/oz.) spread and an end-of-week close below the rising weekly 75-bar Moving Average (currently around 74.3:1) in the gold/silver ratio for the first time in over three years months should seal the deal. At that point, we hope to have at least two profitable short entry signals still intact and working on plans to add even more.

Expect more posts on this spread as things progress.

Gold/Silver Spread: Time For a Short Sale

Ready For a Routing In the Ratio

I just finished up a guest post on the gold/silver ratio over at Martin Kronicle. You can view the article here. The gist of it is that the ratio has reached a level where it has made major reversals in the past. If history repeats, the downside potential over the next year or two is significant.

Gold Silver ratio weekly

Gold Silver ratio weekly

With a ratio of nearly 80:1, I am looking at the spread between 8,000 ounces of silver and 100 ounces of gold. A position in the futures market can be created by subtracting the difference between the value of one 100 oz. gold futures contract and a the value of the sum of one 5,000 oz. silver futures contract and three 1,000/oz. ‘mini’ silver futures contracts.

Chart Work

The June-July gold (100 oz.)/silver (x8,000/oz.) spread is trading less than $1,000 away from the August 26th contract high of -$688. This could potentially turn into a double top or, better yet, a Wash & Rinse sell signal. That’s where the spread clears the old high, only to fall back below it and indicate that a breakout attempt was a failure.

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

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

Furthermore, the spread has closed above the rising 50-day Moving Average every single day since early November. This constitutes as an uptrend. But a two-day close below the rising 50-day MA (currently around -$4,098) for the first time in over three months would potentially trigger a bearish trend change.

How Aggressive Traders Might Do This

If you were a gun-slinging, gasoline drinking, fly-by-the-seat-of-your-pants commodities trader, you could try to short the June-July gold (100 oz.)/silver (x8,000/oz.) spread somewhere up here and risk a four consecutive closes above ‘even money’.

The reason for the four consecutive days above even money is because the spread only stayed above ‘even money’ more than four days in a row just once during the financial crisis. Therefore, a one or two-day event could be a temporary blip.

Then you could double up once the spread makes a two-day close below the rising 50-day MA. After all, the initial position would be showing a profit and you’d be adding more once price confirms.

If You Are NOT Crazy…

On the other hand, what would a conservative, risk-managing, always solvent trader do?

Probably the exact same trade!

The only difference between the two traders is in the position-sizing. The gunslinger may bet the farm on this trade. The smart trader will put on a position size that only risks a small percentage of his capital. If the trade doesn’t work, the conservative trader gets nicked and the crazy trader gets beheaded. If/when the spread gives a new sell signal, the conservative trader can try again. Not the crazy trader, though. He’s blown out all of his capital.

Sometimes the only difference between a winning trader and a losing trader is the risk management strategy, not the entry/exit signals. Make it a priority to become an expert on risk management and position-sizing. That’s how you get rich. More importantly, that’s how you stay rich.

Trade Strategy:

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 at -$1,500 (premium silver). Initially, the spread will be liquidated on a four-consecutive day close above +$500 (premium gold).

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. Initially, the spread will be liquidated on a two-consecutive day close above the August high of -$688.

Gold/Silver Spread: Another Breakout, Another Stop Out

Gold/Silver Spread

On July 10th, 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 +$7,275 (premium gold). The position was liquidated yesterday at the close at +$11,273 (premium gold), resulting in a hypothetical loss of -$3,998. The exit criterion was triggered by the two-consecutive day close above +$10,800.

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

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

The bullish breakout was confirmed by a breakout to new multi-year highs in the gold/silver ratio as well. This morning the ratio reached 79:1. This upside is likely due to the fact that silver has been punished like an industrial metal during the current market meltdown while gold has somewhat stabilized.

December Gold Silver ratio daily

December Gold Silver ratio daily

Until a reversal pattern materializes, the gold/silver (x7,000/oz.) spread does not have any price resistance until it reaches the 2008 all-time high of +$13,519 and the gold/silver ratio does not face resistance until it reaches the 2008 weekly spike high of 84:1.

For now, the blog is flat on the gold/silver (x7,000/oz.) spread. We will continue to monitor this spread, but we need to see some sort of setup start to take shape before we can create reentry parameters.

Gold/Silver Spread: A Failed Breakout Triggered a Short Sale Signal

Gold/Silver Spread

In the first half of last week, the December gold/silver (x7,000/oz.) spread broke out to new contract highs and knocked us out of a (hypothetical) short position. On Friday the spread closed back under the old highs, indicated that the breakout was a failure. We call this pattern a Wash & Rinse sell signal. It’s pretty powerful stuff. As a matter of fact, this triggered our reentry parameters on the short side.

Yesterday the blog reentered a hypothetical short position in the December gold/silver (x7,000/oz.) spread at approximately +$7,275 (premium gold). Initially, we are going to risk this position to a two-consecutive day close above +$10,800.

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

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

At the very least, this failed breakout should put the spread on a trajectory back down to the May 18th multi-month correction low at -$1,679 (premium silver). If the gold/silver (x7,000/oz.) spread is finally ready to leave the multi-month trading range, though, it could be just the start of a much larger decline. Once the May low is decisively broken, we will get a lay of the land and see if any opportunities arise to add to the short position. Given how long we’ve been wrestling with the gold/silver (x7,000/oz.) spread, we hope to really capitalize on it once a real bear market finally develops.

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).