RE:If You Think Silver Is Too LowSilver: How low is too low part 2
Phillip Streible Phillip Streible
Friday December 10, 2021 12:26
Kitco Commentaries | Opinions, Ideas and Markets Talk
We continue our Silver discussion and highlight the chart since November 15, where Silver had reached a high of $25.52/oz. Fast forward 18 days later, we have extended the selloff to a low of $21.81, leaving just the September 29 low of $21.46 as your next significant support. If you recall, on September 29, Fed Chairman Powell stated, if inflation becomes a concern, they will begin to taper. These types of events often act as capitulation points in the markets. I believe we are approaching another critical inflection point on the charts that will lead to another aggressive short-covering squeeze.
One of the main reports that I encourage you to follow is the CFTC Commitments of trader reports. The report helps the public understand market dynamics. Specifically, the COT reports provide a breakdown of each Tuesday's open interest for futures and options on futures markets in which 20 or more traders hold positions equal to or above the reporting levels established by the CFTC. Since the latest peak on November 15, I have noticed that producer shorts had reached -45,639 contracts adding 1,940 more shorts, and managed money net longs were at 35,870, up 8,407 contracts. What you will see is that as prices rise, mining companies often use those rallies to forward hedge production while investors chase higher. Fast forward 18 days to today, both managed money net longs, and producer net shorts have declined significantly. The data tells you that anyone who tried to buy the "breakout" most likely threw in the towel while mining operations have reduced their net shorts, most likely seeing little value in forward hedging at these price levels.
Now back in 2008, the price of Silver reached a low of $8.40, and after calling many coin dealers across the country, the best price I could find for physical was $13. Therefore, I had purchased a 5,000-ounce silver futures contract for future delivery. The process was simple, set up a futures account, fund the account with the required margin requirements (Currently $14,850/much lower back then), and "go long" one December Silver futures contract. By controlling 5,000 ounces, every penny move was a $50 fluctuation in my account, and every $1 move was $5,000. My thought process was to fund the account with $42,000 fully and "take delivery of the Silver" at expiration. The Silver contract had closed out at $11/oz leaving me with an approximate account value of $55,000 (my $42,000 plus $2.60 profit per ounce times 5,000 oz). After, I received a warehouse receipt that provided the weighting of the 5 bars, the serial number, and the location of the warehouse. While in storage, they charged me $76.25 per month for storage and insurance.
Last week I told you the critical chart that I am still watching is the monthly Silver chart. I believe that we are at another junction where either we bounce hard from these lows or another wave of selling in the form of "stop-losses" would be triggered giving us "bargain-basement prices." I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold but can easily apply to Silver." The guide will provide you with all the Technical analysis steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Gold.
Our Strategy
A simple strategy for those suitable clients interested in Silver is to buy the 5,000 oz March Silver $24.50 - $27 call spread for 35 cents or $1,750 a piece plus commissions/fees. The maximum gain is $12,500 minus commissions/fees and achieved if Silver closes above $27 at expiration on February 23, 2022. The maximum loss of $1,750 plus commissions/fees occurs if Silver at expiration is below $24.50 an ounce on February 23, 2022. If Silver does move higher before expiration, we can liquidate the spread any time the market is open for a potential gain. In addition, we can build a position using the 1,000 oz and/or 5,000 oz contracts with the intent to take delivery. Remember the last "Silver Squeeze" occurred was on a Sunday night when the futures and futures options were open, and those that waited for the "U.S. Equity options" open were left disappointed. If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.
By Phillip Streible
Contributing to kitco.com