Commodity Trade Mantra

The Gold-to-Silver Ratio: A Truly Generational Opportunity

The Gold-to-Silver Ratio: A Truly Generational Opportunity

The Gold-to-Silver Ratio: A Truly Generational Opportunity

This week’s Gong Show in the global financial markets reminds me of the early 1980s before the advent of the Internet or online trading or blogs and especially before 30-something financial “advisors” were allowed to go on the national (and international) airwaves or Internet websites and babble on for what seem like days how “The Fed has our back!” as an excuse for buying stocks at 23 times forward earnings.

GDX Chart

Back then, at 4:15 every Friday night, there would be a line-up of brokers and analysts (even the janitor) next to the old teletype machine (I am imagining more than a few raised eyebrows among the kids out there as they quickly Google search “teletype machine” on their Smartphones while sipping a $10 cup of fancy-ass coffee) in expectation of the all-important “Money Supply” numbers that everyone supposed was going to give them a hint as to when interest rates would start to decline from 16%-plus nosebleed levels of the early 1980s.

Today, it’s essentially the same except the teletype machine has been replaced by Janet Yellen and the ribbon of paper giving us the money supply figures is now Janet Yellen’s tongue giving us the all-omnipotent clues to the “hawkish-dovish” leanings of the U.S. central bank. However, one thing hasn’t changed: the absolute LUNACY of these obsessions and how the algo-bots seize upon the word clouds and move markets in trillions with every single utterance out of Janet’s mouth.

So gold and silver immediately bolted higher along with stocks on Tuesday afternoon after which every gold guru on the planet was emailing me about how I had best not “fight the Fed” at risk of anal impalement and that because new, big and smart money buying paper and physical gold would force the bullion banks to execute a managed retreat, my near-term caution was misplaced, unwise and suicidal. So along comes Yellen and tells the world that basically she could care less about inflation (you know – the Fed’s major 100-year mandate is to monitor inflation) and what should have been a $100 explosion in gold prices to $1,350/oz actually becomes a paltry $20/oz move to around $1,242/oz and ends up back below $1,230/oz the very next day, a substantial $57 off the top since earlier in March.

Today the US Dollar Index is down again and while a weaker U.S dollar hasn’t always been a clarion call for the gold bears, it certainly has provided a tailwind of sorts for the gold bulls. The problem for me is that the GDX (shown above) is not exactly lighting up the runway as a harbinger for higher bullion prices and with gold up $5.50 at mid-day, Newmont, Barrick, Goldcorp, and the HUI are all down. Was it not only two days ago that the Fed’s Madame Yellen gave us all the “green light” for gold? Then why isn’t it through $1,300?

Gold Spot Price

The reason that gold and silver are not screaming higher against the most bullish of fundamental backdrops is clear: the bullion bank traders are under orders to clip another $50/oz for their Q1 P&Ls, and as we close out Q1/16, despite gold having the best quarterly advance in over 25 years, it is still $50 off the highs. I stick to my guns; gold MUST have a pullback that shakes out all of the latecomers to the party and gives us all a healthier entry point. All those cynics who were skeptical back in December when I was pounding the table and doing a table-dance on the city hall steps have gone from bearish to bullish in a short three months because they only got in AFTER the HUI skated up the ice over the 170 blueline and are now flat with momentum rolling over. They want the puck deep but I say it gets dumped back into the neutral zone first while they head for the bench sucking wind and hollering for the Gatorade.

Now, having gotten that off my chest, I was doing some work yesterday on the outlook for silver and before I go on, there are some awfully bright people out that know the silver market fundamentals a whale of a lot better than I do. Ted Butler, David Morgan and Eric Sprott are three such people and notwithstanding the fact that they are considered silver gurus, the work they all do is exhaustive and it has its roots purely in the data. A great many orators out there that have great skills in communicating the silver story are, with great respect to Marshall McLuhan, masters of the medium, whether it is by the pen or by podcasts or by standing in front of crowds at investment conferences, but the type of research I have sought out over the past 40 years is the kind that has empirical data behind it—you know—footnotes and references and brackets that tell me where the hell the author got his information.

I recently read an article by Jeff Neilson entitled “Silver Fundamentals: The Numbers Don’t Lie”in which the long-term case for silver is made and as compelling as is my own scatter-brained “ad hoc” instinctive sense of silver being a generational buying opportunity, this article throws all of my “gut feel” type of maverick “analysis” off the 34th-storey balcony and as it sails gleefully through the air, sheets of pencil-scratched paper being ripped to shreds, having the occasion to see the numbers is really quite a revelation. You see, McLuhan inferred that because the form of the medium (oration, penmanship, blog, podcast, You-tube video) embeds itself in the message (“Silver is good/Silver is bad”), there is created a symbiosis of sorts by which the medium influences how the message is perceived. So when I read an article that is grounded in raw data and contains information from as far back as 1344, it is a form of educational enema where the purity of the message is unaltered by the colorization of the medium.

In other words, fact replaces bullshit – and you get read the full article here: It’s really good. . .

The Real Price of Silver

Needless to say, despite my ongoing belief that we are now in a corrective phase for the precious metals, I think that owning silver versus owning gold is a high-probability trade that could be the 2016 Trade of the Year. I am going to put on a trade this week that effectively favors silver over gold and is a high-risk method of shorting the Gold-to-Silver Ratio (GTSR) whose chart I posted a few weeks back:

Gold-Silver Ratio Chart

If I am right about this pending correction in the metals, gold will get taken down harder than silver all based upon the GTSR, so I want to give myself enough time to cover the short in gold and double up on the silver long so I will use the July options. I will buy 100 SLV July $15 calls for $.68 (U.S.$6,800) and also 20 GLD July $115 puts for $2.92 (U.S.$5,840) for a net debit of U.S.$12,640. I will need to see either $108.68 on the GLD or $16.26 on the SLV as breakeven points on this trade by the third Friday in July. By engaging these long positions, I am effectively shorting the GTSR but will need to see this narrow seesaw, back-and-forth trading range of the past four weeks dissipate and do so quickly, lest the time premiums erode away to zero. The risk in this trade is that we see a continued range for gold and silver above $1,160–1,170 for gold and under $16.00–16.25 for silver right through July, at which point both option are worth zero and I am seen chasing my dog around the house with a bottle of JD in one hand and a pair of vice grips for the medicine chest in the other with the headphones playing Zeppelin’s “Kasmir” at max volume.

Let us pray for otherwise. . .

 

 

 

Courtesy: Michael Ballanger

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