Well maybe not the end but it appears as though we may have put in an interim bottom for both gold and silver. Precious metals have been in a steady down trend ever since their most recent price high on February 28, 2012. There are many ways to own both gold and silver including options, futures contracts, physical gold and silver and with Exchange Traded Funds like GLD for gold and SLV for silver. In this article, I will use Exchange Traded Funds and their prices as a surrogate for both gold and silver. On February 28th, GLD closed at $173.49 and SLV closed at $35.83. Through the Wednesday, May 16th close GLD lost 13.85% and SLV lost 26.4%, close to double GLD's loss.
I have been writing about the bearish trend in precious metals since March 22'nd when I wrote, "Options for Silver and Gold as They Start Their Next Leg Down," and again on March 23rd when I wrote, "What is Money Flow Telling Us About the Price Direction of Gold and Silver."
GLD tested support levels of roughly $150 per share on 5/16/2012 and again on 5/23/2012. This was a major level of support going back to 12/29/2011. I have illustrated this level of support with a horizontal magenta line in the chart below.
Since its low on 5/16/2012 it appears as though the price of GLD is consolidating support for another run higher. This can be seen more clearly in the next chart where we examine the closing price of GLD with respect to its standard deviation bands. The cyan indicator in this chart is a measure of the standard deviation of the On Balance Volume while the next indicator down is a measure of the standard deviation of the closing price. Notice how both the measure of On Balance Volume and Price have traced out higher lows since the actual low on 5/16/2012. It has been my observation that when this pattern of higher lows of both the On Balance Volume and the closing price with respect to its standard deviation bands develops then we are at a significant turning point in the trend of the price.
Silver is tracing out a similar pattern to gold, which adds confidence to what the charts are showing because they often trade in tandem.
As the chart of SLV below shows, SLV traded down to support at the $26 level on 5/16/2012, which is very close to the lows it put in back on 12/28 and 12/29/2011. After that low the price of silver exploded higher in a rally that ended on the last day of February. This was a 2-month rally that took the price up over 36%.
Like the chart of GLD above, the chart of SLV's movement with respect to its standard deviation bands is also pointing to an interim bottom in place. Once again the cyan indicator in this chart, which is a measure of the standard deviation of the On Balance Volume, is tracing out a pattern of higher lows. This can be seen more clearly in the second indicator down shown in magenta, which is a measure of the standard deviation of the closing price. Notice how both the measure of On Balance Volume and Price have traced out higher lows since the actual low on 5/16/2012.
Recommendation: Cover all gold and silver shorts and go long both GLD and SLV.
For those who are extremely risk adverse, you can sell cash covered puts on both metals. Currently, $150 strike July puts for GLD are selling for $3.35, which would give you an effective price of $150 - $3.35 = $146.65 if you are put the option in July. Otherwise, you'll pocket the $3.35 x $100 or $335 per contract if GLD closes above $150 at July's expiration.
If you want to invest in SLV, July $26 strike puts for SLV are selling for $0.78 per contract. If SLV finishes below $26 at options expiration in July you will be put the option for $26 - $0.78 = $25.22. Otherwise, you will pocket the $0.78 x $100 or $78 per contract if SLV closes above $26 at July's expiration.
A more aggressive approach would be to purchase August $150 calls on GLD for $7.28 per contract or August $26 calls on SLV for $2.78 per contract. This gives you one more month of time value for the metal to make its move. I prefer to sell shorter duration option contracts and buy longer duration. This allows the time value of the option to work in my favor with the shorter duration contract, while allowing the trade to develop with the longer duration option.
For the super aggressive options investor, you can purchase the August $150 strike for $7.28 per contract and sell the August $150 strike for $4.55 for a net debt of $7.28 - $4.55 = $2.73 per contract. The risk on this trade is if GLD finishes below $150 at options expiration in August then you will lose the entire cost of the long call position of $7.28 and be filled for the put option sold at an effective price of $150 - $4.55 = $145.45.