It looks like the gold market has answered the question we asked in our first “Alert” of the New Year, “Is it finally time to buy gold?” (Click here to read this report.) So far the answer has been a resounding, YES! The ongoing freefall in long term interest rates has significantly reduced the opportunity cost of holding gold. Gold has responded.
Yesterday’s close represented an impressive breakout over both the bullish “reverse head and shoulders” basing formation the yellow metal has been forming over the past few months and the 38-day moving average. While we would not be surprised to see price retest these levels, we also wouldn’t be surprised to see a continuation of the current rally – especially should global interest rates continue their race towards zero.
Will gold’s poorer cousin silver be coming along for the ride? Silver has an industrial component that gold – being almost a pure monetary metal – lacks. This is why silver has dramatically underperformed gold up to this point. But if history is any guide, silver won’t keep underperforming forever. Silver nearly always outshines gold in once a solid bull market in the former is established. With gold well on its way to establishing a bull market we can actually believe in, the time has come to take a good look at silver as well.
Gold / Silver Ratio Says Silver Underpriced in Relation to Gold
The gold / silver ratio spread measures how many ounces of silver it takes to buy one ounce of gold. Gold is roughly 16 times rarer than silver so back when both were actual currency this ratio tended to dominate. As the chart below illustrates, modern ratios are higher. They climbed as high as 80 at the bottom of the current bear market and, at 72.9 as we write this remains extremely high by historical standards.
The gold/silver ratio tends to fall off the table in bull markets due mainly to the price of silver rising much faster on a percentage basis than the price of gold. Will it happen again? It may have begun already. Gold is up another $9 per ounce as we write this for a percentage gain of 0.7 percent. Silver is up 38 cents or 2.5 percent.
Silver Setup Looks Just Like Gold’s
The daily silver chart is looking a lot like gold before it broke out, including a negated downtrend and price action that has blown through both the 38-day moving average and the “neckline” of a “reverse head and shoulders” basing formation. Our first long-term target in silver is $22.00 per ounce which corresponds nicely with old swing highs.
We are going to give the market to late June to meet our first target. We call it “Target 1” because we believe the market could head much higher over the long term should old lows at $14.14 per ounce hold. The chart below shows our long-term outlook. With interest rates falling and stocks stumbling, the return of the bull in metals mat not be as far-fetched as many believe.
Right now we are asking RMB Group trading customers to consider buying July bull call spreads in silver targeting old swing highs of $22 per ounce. The bull spreads we are looking at are currently going for approximately $800. This plus transaction cost is our maximum risk on this trade. Our spreads have the potential to be worth at least $7,500 each should silver hit our $22.00 objective on or prior to option expiration on June 26.
We’ll use two consecutively lower closes below the recent low of $14.15 per ounce as a signal we are wrong and will probably recommend exiting this position and cutting losses should it occur.
Editors’ Note: If you took the gold trade outlined in Alert #1, your positions should now be worth more than twice what you originally paid. If you would like to diversify and get long some silver as well, you can probably do so by exiting a portion of your current gold position and use the proceeds to buy some of the silver spreads we are recommending. Better still, you can do it without increasing your original risk.
Prices can and do change so check with your personal RMB Group broker for the latest on this strategy and to get up-to-the-minute pricing and advice.
If you don’t have an RMB Group trading account and would like to know more about this or any other “Big Move” strategy, call 800-345-7026 toll free or 312-373-4970 direct. You can also email suerutsen@rmbgroup.com or visit us online at www.rmbgroup.com.