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Using TIME to play the Current Gold-Silver Ratio (GLD/SLV)

Posted on June 27, 2019

We’re piggybacking today on a report issued yesterday by all-round mentsch and genius market-watcher, Alan B. Harvard, in his Climbing the Wall of Redemption post called “The Gold-Silver Ratio: One Item Everyone is Overlooking”.

We urge everyone who missed Alan’s piece to review the basic premises raised there, as it goes to the heart of what needs doing today in order to most effectively play the tremendous relative divergence between the price of gold and silver.

To recap: in a nutshell, gold has climbed at a much faster rate of late than silver, raising the gold-silver ratio to a level not seen since the early 1990’s.

And that has created an opportunity.

But not the one most are seeing.

Our Trading Approach

There are numerous ways to approach a gold-silver ratio trade, each as different as the investor who desires to profit from it, his resources and his risk profile.  Subscribers already know these details, as they’ve been privy to our blockbuster special report, Trading the Gold/Silver Ratio, received by all new sign-ups to any of our annual or monthly subscriptions.

That said, most market watchers see the latest breakout for gold as a sign that a move to $1500 is already underway, with silver on track to reach $30 plus.

But we’re not so sure.

As Alan wrote yesterday, the gold-silver ratio can close – as it inevitably will – in one of two directions –

Either…

  1. Silver shoots higher at a rate that defies gravity, while gold’s ascent assumes a more modest trajectory (and we note that this is the view of literally all of the 25 or 30 commentators on the subject that we recently surveyed)

Or…

  1. Gold can go into a 737 MAX nosedive at a velocity that far surpasses the rate of decline for silver (a view for which we’re the lone proponents today – as far as we know).

In both scenarios, the existing gold-silver ratio contracts, as everyone expects.  But in the former case, precious metals bulls get crushed, while in the latter – using the strategy that we outline below – an intelligent investor can make a killing.

And Here’s How We Do It

Take a look at the following chart that shows the last month’s trade of the US Dollar against gold, as represented by the SPDR Gold Shares ETF (NYSE:GLD).

As you can see, moves in gold have mirrored with diamond-cutting precision those of the dollar.  In fact, it’s our view that you can pretty much throw out all the theories being circulated to account for gold’s recent spasmodic clamber to $1400.  The reason for the climb is very simply dollar weakness.

Period.

That means as soon as the buck resumes its climb, we could get a reversal of similar proportions, and one that knocks the wind out of goldphiles from here to Vanuatu.

The dollar is resting on strong support today and is due for a bounce.  Count on it.

Moreover, GLD is now overbought, according to all our indicators, and should experience weakness in the weeks ahead.

All in the details…

Our trade today seeks to capitalize on the contraction of the gold-silver ratio in the most profitable manner possible.

And that means we’re using CALLs – selling the GLDs and buying the SLVs – in order to avail ourselves of the tremendous boost in implied volatility in the price of GLD options of late.  We’re also taking advantage of time, in a way that only options can afford a knowledgeable investor.

And with all that in mind, our trade today goes like this –

A Jew and His Gold recommends you consider selling the GLD August 2nd 135 CALL for $1.84 and buying the SLV January 15th (2021) 14 CALL for $1.88, for a total debit of $0.04.

Note, too, that the GLD CALLs expire in 35 days, while the long SLVs are alive for another 19 months!

Many happy returns,

Matt McAbby

 

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