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Buy the January Silver ETF (SLV) January $35 calls at $2.25 or best
11-9-2011 ? 12:00 pm EST
expiration date: 1-19-2012
($5,000/100/2.25) = 22 contracts
I received an urgent call from my friend at Fidelitrade (http://fidelitrade.com/) this morning, a leading dealer in 1,000 ounce bars of gold and silver. He had just been cleaned out of the 1,000 ounce silver bars at $34,930 each, and there was nothing in the pipeline. What the hell was going on with silver?
I tried to calm him down with my usual measured, rational, global, cross asset class explanation, and made the following points:
*An interim solution, or at least some progress, seems imminent in the European debt crisis. Any solution means a European style quantitative easing and a TARP, and we here in the US already know how positive those can be for risk assets.
*My friend at the Swiss National Bank told me yesterday that this resolution should send the Euro down to parity against the dollar (click here?for ?Get Ready to Short the Euro Again?) . This is prompted massive European buying by panicky individuals across the entire precious metals spectrum. That?s where his silver 1,000 ounce bars went.
*Now that gold is effect a paper asset, it can ride on the coattails of American stocks in a rally that now looks to carry on until year end, and possibly into January.
*My meeting with the Chinese government last week confirmed my belief that the People?s Bank of China is going to sit on the bid for gold and silver looking to increase their holdings of hard assets as a hedge against a weak dollar in a future recession. At least this is what I told them to do.
*When I went to buy a stack of Chinese once ounce silver panda coins in Shenzhen, there was a one hour wait at the store. I usually buy a dozen of these to use as tips and bribes to buy my way across the Middle Kingdom to get the information I need. When I asked others in line why they were buying they told me they were moving money out of real estate into silver because of the recent sharp markdowns in new condo prices. Gold coins are too expensive for someone who earns only $500 a month.
*Gold seems to be taking another run at the old high of $1,922. If the ?RISK ON? trade continues, it might even make it. Then the hot money will rotate into the next natural target, silver, which has so far lagged gold?s move. That makes silver a great ?catch up? play.
*The technical set up for silver is looking really interesting. As I write this with the (SLV) at $33.60, it looks like we are just about to break the 50 day moving average to the upside. If successful, then the 200 day moving average at $35.60 is a chip shot. Break that, and we could fill in the $10 of air on the chart created by the September crash and gap all the way up to the old high just short of $50.
*Having discounted a recession over the summer that was never going to happen, risk assets are now ?undiscounting? it.
*In the meantime, economic data across a broad front are going from flat to showing a gradual improvement. Corporate earnings that were expected to grow at 13% actually came in closer to 17%. Since 50% of the final demand for silver is for industrial purposes, this is a great play on a recovery.
*Traders are getting sick to death listening to all of this BS about Europe, which is largely being exaggerated by journalists jonesing from free continental vacations. Ignore Europe, just by the dips in all risk assets, and turn off CNBC.
My friend said thanks, and indicated that he would spend the afternoon scouring the marketplace for more silver bars and coins of any description, promising to renew his subscription to Macro Millionaire.
The conversation prompted me to do a quickie analysis of the options market and look for some inviting plays. Since I am 80% in cash, and up 47% on the year, I have plenty of room to take a flyer here. That led me to the January Silver ETF (SLV) January $35 calls. Here are the numbers I came up with:
*A run up to just the 200 day moving average takes the $35 calls to $3.00, up 33%.
*A move to fill the September gap takes silver to $39 and the options to $5.00, up 120%.
*A run to the old high under $50 takes the options to $15, assuming there is no time premium left by the time we get there, a return of 670%.
I am going to use a stop loss here of $30 on the underlying. Those who can?t do options, just buying the (SLV) ETF outright here makes a ton of sense. Adrenaline junkies can even consider the double leveraged silver ETF (AGQ). Just make sure you fasten your seat belt.