Big downward corrections over the past few days in gold and silver have driven prices down to just above key support. Gold settled yesterday at $1,466.40 per ounce, down 3% from last Friday’s close. Silver settled at $17.01 per ounce, a drop of 5.8% over the same time frame. We view both of these declines as opportunities to establish or add to long positions in anticipation of a volatile election year in 2020.
Gold and silver have a long history of doing well during periods of chaos and disruption. Not surprisingly, they’ve taken it on the chin over the past few days. This was due to Jerome Powell’s stock-boosting rate cut and the “good news” of progress in the “Phase 1” trade negotiations with China announced earlier in the week. News that interest rates in Europe have become a little less negative also helped push metals lower.
But have things really changed all that much? We doubt it. We’ve been hearing about “good news” in trade talks for a long time now. We are still waiting. We sense there will be an agreement on trade. But that doesn’t necessarily mean “good news” for the USA. A “buy the rumor, sell the fact” trading opportunity in stocks may be developing. Stay tuned.
Famous billionaire investor Ray Dalio made a splash earlier this week with his LinkedIn interview/blog post “The World Has Gone Mad and the System Is Broken”. We believe every serious investor should read it. Stocks may be making new highs, but if Mr. Dalio is right, that doesn’t mean all is well.
Here are some of Ray Dalio’s key observations:
- Money is free for those who don’t need it, and unavailable to those who do.
- Flooding the system with more liquidity is driving up the price of assets as those who don’t need the money scramble to find places to put all the cash being thrown at them. None of this is helping the “real” economy.
- Global debt levels have reached the point where an economic crisis is almost inevitable.
- Pensions will be under tremendous stress due to declining returns going forward.
RMB Group will be exploring all these observations in our next blog post. We will also expand the conversation to talk briefly about the fractional reserve banking system, which we believe to be the source of the wealth-generating dynamism in capitalism. We also believe it is this dynamism’s nemesis. Debt has the power to create – but also to destroy.
The explosion of global debt is the full moon shining over Dalio’s “world gone mad.” As the chart below illustrates, debt is now larger than at any other peaceful period. This is one of the reasons why we believe it would be foolish to expect a return to “normalcy” anytime soon. Debt and default nearly destroyed the modern global economy in 2008. With the world’s central banks nearly out of ammunition, expect the next crisis to be far worse.
Gold and silver have a long history of out-performing in times of crisis. We will continue to keep a close watch on both.
Silver Getting Closer to Key Support
We remain extremely bullish on silver, especially in relation to gold. We’ve lowered our 6-month upside target in silver to $19.50 per ounce and our 12-month upside target to $22.50 per ounce due to recent corrective price action. This is down from our prior objectives of $20.00 and $23.00 per ounce respectively. Key support remains at $16.00 per ounce. RMB trading customers who already have long positions in silver may want to consider using a downside probe below $16.50 ounce as an opportunity to add to bullish positions.
Those without a long position in silver may want to consider dipping their toes in the water here. We still like the December 2020 $20.00 / $23.00 bull call spreads using the COMEX 5,000 ounce options we recommended in our latest special report “Silver for Pennies on the Dollar.” These spreads settled yesterday for $1,875 each.
Consider purchasing a half-position using the bull call spreads referenced above at current levels to gain some exposure. Pay no more than $1,900 per spread. Your maximum risk is the amount you pay plus any transaction costs. These spreads have the potential to be worth as much as $15,000 each should silver futures rally to $23.00 cents per pound at or prior to expiration on November 24, 2020 – a little over a year from now. We get upside exposure to silver through the 2020 presidential election without a whole lot of risk.
Data Source: Reuters/Datastream
Gold Also Near Key Support
Gold has performed far better, from a technical perspective, than silver throughout its year-long rally. So it makes sense that it hasn’t retraced as far as its poorer cousin. Gold is, however, close to its first key support levels at $1,450 per ounce. RMB trading customers who’ve been following our 2019 campaign in gold know that we’ve been lightening up our bullish position after each of our upside objectives have been met. $1,640 is our last remaining objective.
RMB trading customers who don’t have a pre-existing bullish position in gold may want to consider establishing one should the yellow metal dip below $1,450 per ounce. Consider purchasing December 2020 $1,550 / $1,650 bull call spreads or December 2020 $1,600 / $1,650 bull call spreads using the 100 ounce COMEX options. Check with your RMB Group broker for up-to-date prices.
Data Source: Reuters/Datastream
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. Want to know more about trading futures and options? Download our FREE Report, the RMB Group “Short Course in Futures and Options.”
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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