White Metal, White Hot (SLV,GLD)

We mentioned it before, but it bears repeating – the latest moves in the precious metals market have been both extraordinary and widely advertised.  And while it’s clear to all that the move off the December lows has breathed new life into gold and silver, it’s not so clear whether it will last.

axe

There we go again, throwing water on the precious metal flame.

 

Certainly, there are doubts – and today, those doubts are potentially more potent than they were just a week ago.

 

But before we get to them, please, don’t get us wrong, the latest rally has been tremendous, and we acknowledge the very real possibility of a turn in the PM market.  Every bear market ends, regardless how long it lasts, and gold’s turn will also come… if it hasn’t already.

 

What makes us worry is not so much the action in gold.  Rather, it’s silver – the latecomer to the party – that appears to have imbibed a little too much and a little too quickly.

 

Have a look here –

slv

This is six months’ worth of the iShares Silver Trust (NYSE:SLV), a reliable proxy for the metal.

 

What’s clear from the chart is that SLV’s price got ahead of itself and is now due for a slide.

 

Why?

 

  1. A look at the RSI indicator, in particular, reveals an overbought 80 reading that almost without fail leads to a cessation in buying momentum (in blue). Whether sellers emerge en masse is a different story, and one that will determine whether we get a slow drift sideways or a full blown dive toward the former lows.

 

  1. The parabolic nature of SLV’s price action over the last 30 days also speaks to the likelihood of profit taking in the near term (in red). The move of the least few weeks is simply unsustainable.

 

The Beginning of the Bull or the End of the Retracement?

 

Overall, we say chances are 50-50 that we’ve closed the door on the bear market for gold and silver and entered a new bull market.

 

And we would remind one and all that, on the one hand, gold also made a surge higher that resulted in an overbought RSI 80 reading in mid-February, but since then has managed to climb even further, closing on Friday at fifteen month highs.

 

On the other hand, silver led the precious metals top-out parade back in 2011, busting parabolically toward $50 an ounce before turning lower in a dive that has lasted exactly five years, and that predated both gold and the mining sector’s turn lower by half a year.

 

With that in mind, we’re left to wonder whether we are, indeed, at a new beginning and should be long the PMs, or if now is the best time to go short and ride this sucker to the morgue.

 

A look around the rest of the precious metals universe reveals few clues.  But there is one that might be worth noting – a couple of other subsets in the precious metals sector have flown to stardom over the last several weeks and may also be due for a rest.

 

The junior miners is one of them.  A look at the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), which has yet to reach the manic technical levels seen in silver, has still managed to gain an unprecedented 127% in less than four months.

 

We repeat, however, that the group is still not overbought in a strict technical sense.

gdxj

Green like Money

 

We’re going to return to the precious metals in just a moment and offer you a great trade, but first, we’ve another item to update.

 

It’s all about Microsoft (NASDAQ:MSFT).

 

Just over a month ago, on the 22nd of March, we launched a trade that looked hopeful – at the time.  The letter was called Don’t Miss the Boat, and there we urged you to partake of a three-legged MSFT initiative that looked like this:

 

  1. We suggested you sell the MSFT April 29th 57 CALL for $0.62
  2. Sell the MSFT April 29th 51 PUT for $0.84, and
  3. Use the proceeds to purchase the MSFT May 55 CALL for $1.55.

 

Total debit on the trade was $0.09.

 

Then, Microsoft went into convulsions.

 

So, rather than risk taking a loss, we immediately assumed a defensive posture, and last week, in our April 26th letter called Trading Basics, we explained that we were expecting the decline to continue, and…

 

  1. Left open the short 57 CALL to wither,
  2. Bought back the short 51 PUT for $0.28, and
  3. Left the 55 CALL alive to capitalize on an eventual bounce-back.

 

Then, last Friday, the PUTs expired.  So today we’re left with just a single open MSFT May 55 CALL and a debit of $0.37.

 

A final note – it’s a darn good thing we closed the short PUTs.  MSFT closed at $49.87 last Friday. We would have been in the hole $425 had we left things be.

 

This Week’s Run to the Bank

 

Moving on.

 

As we intimated earlier, we’re going to recommend a precious metals trade for you today, and it’s based on the observation we made above, that silver has had too much fun of late and is very likely to retrench here, particularly vis-à-vis her more wealthy counterpart, gold.

 

Let’s look at a chart to get a sense of the relative performance of both metals of late.

xau

Silver and gold have turned in banner performances, with silver outperforming nicely of late.  But we’ve also thrown in the miners here, represented by the grand-daddy of the precious metals indexes, the PHLX Gold/Silver Index (XAU).

 

And that changes the landscape altogether.

 

As silver and gold stall for a breather here, we say the high flying miners will take it on the chin – relatively speaking.  That’s why we’re going head-to-head XAU vs. GLD.  And it looks like this –

 

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Wall Street Elite recommends you consider buying the XAU May 85 PUT for $2.30 and selling three (3) GLD May 120.50 PUTs for $0.81 each.  Total credit on the trade is $0.13.

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Wall Street Elite recommends you consider buying the XAU May 85 PUT for $2.30 and selling three (3) GLD May 120.50 PUTs for $0.81 each.  Total credit on the trade is $0.13.

 

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With kind regards,

 

Hugh L. O’Haynew

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