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As I suspected when I wrote my last Trading Comments a week ago, silver was ready to explode. And indeed it did, climbing 7.7% on the week. Gold had a great week too, climbing 2.1%, but silver’s relative outperformance resulted in a -5.2 drop in the gold/silver ratio to 43.0.
Continue to watch the gold/silver ratio for important clues as to what lies ahead, and specifically, whether the “ratio knifes through the low 40s”. It has made a good start toward that goal, and there is no reason to suspect that it will not continue to progress further. With the backwardation in spot-to-Dec’15 silver blowing out further to an astounding and unprecedented 73¢, it is clear the short squeeze in silver I have been talking about continues to unfold. Nevertheless, when it comes to markets – as I always say – anything can happen. So it is time to tighten up our trailing stops.
Lastly, we need to roll our March’11 silver calls. We began this trade nearly 1-year ago on February 26, 2010 with Dec’10 $18 silver calls. We added a second position on July 29th. We then rolled out of the Dec calls on November 15th with $13.749 of profit, and now hold two Mar’11 $26 calls.
I want to roll again, but do not think we should pay a lot of premium. I therefore recommend rolling into the May expiry and at a high out of the money strike. By rolling I am still aiming for my $50 target when we began this trade, but most importantly, as silver’s price has risen, the trade has become more risky. So I do not want to risk much of the profit on this trade that we have already gained. More to the point, this recommendation is very speculative and therefore not for everyone. See below.
Gold
1) Long two positions from $1339.60 bought on the Comex spot gold close on February 1, 2011. Stop-out point: sell both positions at an intraday stop-out point if Comex spot gold trades at $1366.00. (updated 19 February 2011)
2) Long from $1352.30 bought on the Comex spot gold close on February 3, 2011. Stop-out point: sell at an intraday stop-out point if Comex spot gold trades at $1374.00. If stopped out, then re-buy this position on the first Comex spot price close above $1380.00. (updated 19 February 2011)
3) Long from $ 1372.25 bought on the London AM fix on February 15, 2011. Stop-out point: sell at an intraday stop-out point if Comex spot gold trades at $1378.00. If stopped out, then re-buy this position on the first Comex spot price close above $1392.00. (updated 19 February 2011)
Silver
1) Long from $28.45 bought on February 3, 2011. Stop-out point: sell at an intraday stop-out point if Comex spot silver trades at $31.45. (updated 19 February 2011)
2) Long from $28.91 on the February 4th London silver fix. Stop-out point: sell at an intraday stop-out point if Comex spot silver trades at $31.58. (updated 19 February 2011)
3) Long from $29.064 on the February 4th Comex silver close. Stop-out point: sell at an intraday stop-out point if Comex spot silver trades at $31.90. If stopped out, then re-buy if the Comex spot price the same day trades above $32.25. (updated 19 February 2011)
Gold/Silver Ratio – traders are short the ratio (i.e., long silver and short an equal dollar value of gold) from 67.4, the June 11, 2010 close in New York. Stop-out point: unwind this position if the ratio closes in New York above 46.5. (updated 19 February 2011)
Comex options (options are high-risk and therefore not for everyone):
Sell the two Mar’11 Comex 26.00 silver calls bought at $2.267 on November 15, 2010 and at the same time buy two May’11 Comex 40.00 silver calls. I will use the February 22nd (Feb 21st is a US holiday) Comex closing prices for record keeping.
Long one Dec’11 Comex 1500 gold call from $50.80, the February 1, 2011 Comex close. Hold this call without any stop-out point. (updated 19 February 201 View all Trading Comments >>
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