Was Silver going to be a hot commodity this quarter? If so what will the ETF SLV do?
Central bank policy gave the green light to the metals market in the third quarter. Normally what happens is that all the show goes to gold and its lesser silver cousin follows in lock step behind. It was quite pleasant to see silver outrun gold last quarter. Another ironic statistic about silver is that it has had a better run than gold because of the QE's. Look at some of these statistics:
In the 15 months following the first round of quantitative easing, silver rose about 53 percent, which is twice the rise that gold saw. During QE2, the metal gained 24 percent, or three times as much as gold. In anticipation to the QE3 announcement, silver followed gold's lead, but true to form, it outperformed gold on a percentage basis. Silver climbed 35 percent above its June low.
The metals have since slowed down. Some market participants have expressed concern about the extent of silver's recent rally, and have suggested that the market could still be overbought. While we know the U.S. has taken steps to boost the economy (that appear to favor metal's growth), so have China, Japan, Australia, and the European markets. Going into October, hedge funds were reportedly the most bullish on silver in seven months.
So where do we go from here?
Silver's growth in Q3 was due mainly to the anticipation of QE3. Since that time, the celebration and anticipation has passed and the metal has lost most of its momentum. It is has been beaten back numerous times to the $35 level and it does not look like it can get through there just yet. This makes sense. Earlier in the year, there was selling pressure around $35 and $37, so there is a real mental block around these prices.
Pressure on silver is pushing the price lower as Q4 progresses, and discussions about a potential correction are emerging among market participants. The World Bank recently downgraded its forecast for the metal. There seems to be a hesitation to invest just yet, and investors are looking for another catalyst to send the metal up again.
On Monday, the final New York spot price for silver was $33.16.
Adversely, there is a lack of definitive direction for the metal, and no one will give one. But the unspoken sentiment is that something will happen soon and the lean is toward a correction.
SLV has built a well-defined resistance area at about 34.10. One could see that coming when the stock spent a good 3 weeks in an extremely overbought environment while it climbed to its high point recently. Since its peak, I can observe a weakening pullback still in place. It has been losing strength for now. The MACD supports this same move. If one looks at the charts, it seems that SLV is just staring to pull back and may continue in that venue for an undetermined amount of time.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.