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Precious Metals? Better a Can of Spam! (IAU/SLV)

Posted on April 19, 2020

Matt McAbby spoke last week about the tremendous tension in commodity markets, and we feel it on the equity side, too.

It looks and feels like stocks have hit an upside wall – at least for the time being – and could be headed for a sharp snap lower in the near term.

The following chart from BofA/Merrill highlights the insanity in a manner that words alone could never convey –

While the market churns through its greatest volatility episode in a decade, money has been pouring into the above-named five behemoths at an unprecedented rate.

In just over eight weeks, the level of ownership in Microsoft, Apple, Amazon, Alphabet and Facebook has ratcheted higher to account for a full 22% of the S&P 500’s market cap.

That’s a 20% higher concentration than obtained at the peak of the 2000 dot.com bubble!

And that’s nuts.

Head Fake!

Yet it’s not on the equity side that tensions are most profound.

Our weekly round table here at A Jew and His Money has nearly everyone in agreement that precious metals is the asset class most poised for a structural splinter – one that could result in a much longer trend reversal than we’re expecting on the equity side.

Something Ain’t Right

Since the last precious metals’ price-spike in the summer of 2016, the return on gold, silver and the miners has diverged dramatically.

The chart below shows the three mapped against one another, and we’d urge you to take special note of two items –

  1. The gap between the metals themselves (as represented by GLD and SLV), and
  2. The wheel-spinning in the mining sector (represented by GDX).

Have a look –

This is not the sort of action one would expect over the longer term.

Gold has advanced 25% since the 2016 high, silver has fallen by the same amount, and the miners have gone precisely nowhere.

And it doesn’t make sense.

Because in spite of –

With kind regards,

Hugh L. O’Haynew

6 responses to “Precious Metals? Better a Can of Spam! (IAU/SLV)”

  1. Greg says:

    Hi Hugh,
    Thank you for the trade. Would we buy equal shares of SLV to shorted IAU shares? I’m 99% sure yes.
    (and then of course a put for each group)

    “You will be required to buy back your short IAU position…” Does that also apply to the shorted IAU stock or just the put? I think the put is at 16.00 and the stock would be at market?

    If SLV gets stopped out at 10.47, then other two positions would need to be unwound also or let them go until perhaps until expiry…?

    Thank you
    – Greg

  2. Hugh L. O'Haynew says:

    Hi Greg,
    Thanks for writing.
    Yupperoo!
    Equal parts IAU and SLV.
    But you’re ONLY selling a PUT on IAU.
    The long SLV shares remain just that — a long stock purchase.
    The trade, therefore, has three legs — long SLV, short IAU, short IAU PUT.
    The short IAU 16 strike PUT obligates you to buy 100 IAU shares at $16 at expiry. You must therefore have $1600 set aside for that purpose. The short IAU stock sale offers you precisely that sum up front ($1608). DON’T spend it!
    The short IAU stock and short IAU PUT will both vanish into thin air at expiry, canceling each other out and taking exactly $1600 from your account.
    As for the long SLV shares, we hope they rise significantly in the interim, and you can either hold them beyond expiry, sell them before or after — you’re completely at your leisure to maximize your take from them.
    On the other hand, you can bail out to minimize your losses at any time, too.
    Just make sure you do so before the stock hits $10.47.
    At that point you start taking on water.
    Hope that helps, brother Greg.
    Stay in touch — and best of luck!
    Hugh

  3. Hugh L. O'Haynew says:

    And yes, it’s almost a certainty that you’ll leave the other two legs to dissolve at expiry.
    A very specific set of conditions would have to obtain in order to make an unwind of the position worthwhile.
    We’ll keep an eye on it, and inform you if it comes to pass.
    All the best, Greg,
    Hugh

  4. Daniel Farberoff says:

    Good morning Hugh,

    My broker is being ridiculous and not allowing me to short sell, I was thinking if I just buy the lot at the current price and hold it would that effectively be the same play (I realize that capital would be tied up in the play).

    Thank you,
    -Daniel

  5. Daniel Farberoff says:

    Or perhaps buying a put for a spread?

    • Greg says:

      Hi Daniel,
      I had the same problem on a past trade.
      Call the broker and ask why you can’t make the trade as you’re attempting to. They’ll walk you through it and you’ll find out why.
      I’m guessing it’s either a margin issue or typo on the instructions of the trade.
      I’m a recent member here and just trying to help.
      My broker says the hold time will be long and its not at all so don’t be discouraged. Good luck!
      -Greg

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