The last article I wrote on silver was about 6 weeks ago and I gave my opinion on what would happen to the metal this fourth quarter. I also suggested a short-term income strategy for those who look to me for such things.
Here is the play I suggested:
The Options Play
With the metal presently trading at 31.93, I am looking at a bearish debit spread.
- Buy the January 2013 put with a strike of '32.00' (priced at $1.77)
- Sell the January 2013 put with a strike of '33.00' (priced at $1.30)
- Net Debit to Start: $0.47
- Maximum Profit: $0.53
- Maximum Risk: net debit
- Maximum Length of Play: 3 months
Reasoning behind the Trade
- Momentum has petered out to nothing after the huge anticipatory move up.
- A quick move up always calls for a correction.
- The lack of definitiveness in direction bares a bearish lean.
I closed out that position last week when the stock moved above 33 on Thursday with a profit. In this particular strategy, I was looking to catch a quick profit on a rebound, and that is exactly what happened. Investing always has a bit if luck involved and I feel that the quick move above 33 had a bit of luck involved. But overall, I did not expect the stock to continue to move up without a great bullish catalyst.
Now we are into December and the government is working on the fiscal cliff for the country. We have been hearing that there is progress being made and then we hear talks have stalled. With each statement, the market goes up or down. We have less than 30 days left and both political parties are far apart on any major agreements to solve the problem of tax hikes and spending cuts that could throw the economy into a recession. This is good for gold and silver in the short term, but I would not bet on anything consistent. I believe the markets will continue to react to news as it comes out.
Short Term Income Trading the SLV
In the short run, I would not advise on an income play at this time. I believe that the markets are reacting immaturely to news (as it seems to do often) on the fiscal cliff almost on a daily basis. Because of this, I am not sure if I would trust market direction or precious metal direction in the short term. One bad week of negotiations could send silver and gold up while one good week of progress could send the markets up and precious metals down.
Long Term May be a Different Scenario
If I look out into the future a few years, silver looks like a better investment for those who are interested in the metal. The demand for silver comes in two forms, one is for collecting and the other is for industrial use. In the near future, silver may see a huge increase in demand from the industrial sector.
It is not surprising that industrial expectations for silver dropped by 6% but as the year ends and 2013 approaches, analysts are expecting a recovery to start as we give birth to the New Year. GFMS believes that a 6% loss will be claimed back in 2013. One of the big catalysts of the rise in the industrial demand will be from Ethylene Oxide. This simple compound has a wide variety of uses in the industrial sector and silver is a catalyst for the production of this compound.
Besides Ethylene Oxide, the auto industry will help raise the demand for the metal. Silver's greatest industrial demand is by far the electrical and electronic sectors. It just so happens more and more electronic items are being added to automobiles and as car sales increase, so will the need for silver.
(click to enlarge)
Technically Speaking
It looks like SLV could be forming a trading channel if it does not move up or down. Since its quick rise in September due to the QE3 it has formed a nice "V" pattern. As I observe the stock, I cannot see any hint of direction from the indicators. Both the MACD and the RSI indicators appear to be mirroring the stock. The Bollinger bands move up and down with the stock and could uphold a channel pattern. The only other observation I can make that supports this is the 50 day MA as it starts a straight move sideways.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
