Firecrackers and bottle rockets aren’t the only things exploding this summer. Gold and corn and have already put on a show. The yellow metal rose 13.5% a month and the yellow grain soared 38.5% in a little over a month, hitting our initial upside targets in the process. As we expected, both of these markets rose a little too far, a little too fast and are now in the midst of inevitable retracements.
RMB Group trading customers that followed our suggestion to exit their December $1,400 / $1,450 bull spreads in gold and half of their December $4.20 calls in corn have seen their patience pay off. Now that both markets are retracing, is it time to re-establish full on bullish positons? Let’s take a look, starting with gold.
Data source: Reuters
Gold hit our first upside target of $1,435 per ounce and rallied as high as $1,442 per ounce before reversing dramatically, declining 4% to a low of $1,385 in a just five days. That low has held up so far. Gold is up $20 today which is good news for the June 2020 $1,450 / $1,500 bull spreads we suggested purchasing for $750 or less in early June. Continue to hold these spreads as our original upside target of $1,500 per ounce and new upside target of $1,625 per ounce are now in play.
Gold volatility has risen and with it, the price of COMEX gold calls. This is bad news for anyone trying to add to or establish a new bullish position now. We will monitoring this market to more reasonable entry opportunities down the road. For now our focus is on silver.
Could Silver Be a “Back Door” Play on Gold?
Gold may be soaring but silver is sleeping. Compared to its richer cousin, the “poor man’s gold” is getting poorer and poorer by the day. Like platinum, silver is now viewed by traders as an industrial rather than a precious metal despite thousands of years of history indicating otherwise. It now takes 92 ounces of silver to buy one ounce of gold. This is hard to imagine considering that gold is only 15 times rarer than its pauper cousin.
Data Source: FutureSource
The last time silver was this cheap vis-à-vis gold was in the early 1990s. How much poorer can silver get? Let’s assume that the gold / silver ratio simply reverts back to old resistance at 82.50 ounces of silver versus one ounce of gold. Let’s also assume that gold
Data source: Reuters
remains trading right where it is today at $1,408 per ounce. Divide $1,408 by $82.50 and you get a silver price of $17.07 per ounce. That’s $1.83 more than the $1.524 per ounce silver settled for today. And that’s with the ratio merely retracing back to what were 30 year highs.
Those looking for low cost entry on the bull side of gold may want to consider taking a flyer on its destitute cousin instead. Silver options are reasonable right now and, if silver’s thousand year relationship with gold holds up, it could be a better bet all around. Silver has spent the last 5 years coiled in narrow trading range. Gold has already broken out of its trading range. Silver volatility is also near recent lows. Gold’s volatility is on the rise.
How much more does gold need to rise to awaken the sleeping giant which is the silver market? Is it $50 more per ounce? Is it $100 more? We don’t know. What we do know is the gold / silver ratio is about as far out of whack as we’ve seen in our 30 years of trading commodities. There are three ways this spread can get back into line: 1) silver rallies more than gold; 2) gold falls more than silver; 3) silver rallies and gold falls.
Focusing more on silver right makes sense because it has the bigger upside potential for a lower cost (and risk) potentially making it a better performer should either of the three scenarios listed above play out. Should gold continue to rally, our conservative upside target for its pauper cousin is $17.00 to $17.50 per ounce. Our longer term targets higher.
December COMEX $16.00 / $17.00 bull spreads in silver settled today at $965. December $16.50 / $17.50 bull spreads settled at $675. With 146 days left until expiration, either would offer a good, low cost peek at the upside. Both have the potential to be worth as much as $5,000 should silver breach the upper end of its recent trading range prior to option expiration on November 25, 2019.
It’s All-About Weather in Corn
Data Source: Reuters
Like gold, corn broke out of a multiyear trading range and then retraced. Unlike gold, whose fortunes are dictated by fears of global conflict and interest rates, the ultimate direction of corn will be determined almost entirely by Mother Nature. Most analysts will agree that this year’s crop got planted too late to produce the bumper crops of the last few years. What the market is sorting out now is just how bad the damage will be.
Corn hit our first upside objective putting our second target of $5.50 per bushel in play. It’s still too early in the growing season to consider adding to our half position but a pull pack to the 50% retracement level of $4.00 per bushel in the front month futures contract will cause us to sit up and take notice.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1991 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com.
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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