With the stock market and the U.S. dollar in a slump, countless investors are pulling funds out of their paper assets accounts and investing into tangible assets. One such tangible asset is Silver. The reason for this transition is that time and time again commodities, such as gold and silver, have proven themselves to be a safe haven for investors during periods of economic uncertainty. And with the majority of today’s analysts agreeing that the U.S. is indeed in recession, the silver market has become a flight to a quality investment vehicle. The current price of Silver solidifies this drastic transition and economic uncertainty. On March 6th, the price of silver reached $21.32 per ounce; the highest silver has been in 28 years. The good news for investors that did not reap the benefits of the latest bully rally, is that there are very strong indications that the entire metals market will continue to rally for several more months, and some predict even years! Here are few reasons:
The Stagflation Affect
One such catalyst that could push the price of silver even higher is inflation. Many investors, institutions, and even everyday traders are scrambling to buy precious metals to hedge against this economic condition. The best part is that Ben Bernanke doesn’t seem to think the U.S. has a problem with inflation. With Crude Oil prices well above $100 dollars a barrel and Wheat prices well above $10 dollars a bushel, one would begin to think that we are headed for something worse than inflation, but Stagflation! This is the economic condition in which we have a stagnate economy (otherwise known as a recession) coupled with inflation. The first question that probably comes to mind is has the U.S. ever experienced stagflation before? The answer is, yes! Surprisingly, it was less then 30 years ago! During the late seventies and early 80’s, the U.S. economy was experiencing stagflation at its best. The economy was going backwards, and prices for everyday goods and services were drastically rising, including commodities. In fact, if you factor the value of the dollar in the late 70’s and inflation, several commodity prices were higher then they are today; more reason we should see silver prices as being considerably undervalued.
Global Squeeze
Another reason as to why silver is likely to continue to rally is, rising global demand. Non-investment demand for silver is based primarily on industrial demand. This can include electrical, medical and photography, as well as the jewelry industry. This non-investment demand is said to signify about 90 % or more of annual silver consumption. Due to the extreme growth of numerous emerging economies globally, especially that of the BRIC economies (Brazil, Russia, India and China), demand continues to outpace supply. Combine that information with the fact that presently there is a substantially low amount of silver globally to meet investment and non-investment demand. One market analyst, Mark O’Byrne, published an article last year titled, “Why the silver price is set to soar.” In this article O’Byrne reports that in 1900 there was roughly 12 billion ounces of silver in the world. By the year 1990, the research firm, the CPM Group, reported that the statistic had been reduced to around 2.2 billion ounces of silver. In the present day, it is estimated that the silver supply has decreased to about 300 million ounces in above-ground silver. Once the silver is consumed by industrial uses, O’Byrne points out, it is gone forever. CBS Marketwatch stated in a March 2007 article, “Due to current supply/demand trends, the amount of silver above ground is projected to shrink to a critically low level in 2010. As supply shrinks, prices will keep rising steadily to new highs.” In other words, the supplies for silver worldwide are reported to be shrinking, as the global demand for the metal is consistently increasing- this puts the metal in more demand than ever before.
Figure 1.0
There is an overwhelming amount of information that point to higher silver prices in not only in the short-term, but in the long-term as well. However, as an options trader, I am more concerned with the short-term outlook, which just so happens to be very bullish. The next step is choosing the strategy to use in order to maximize profit potential and minimize risk. I feel that a long time spread, also know as a long calendar spread, is a great option strategy to use during this type of highly volatile market. The strategy entails a trader purchasing a call option for the front contract month (May) and selling a call option on the next contract month (July). The strategy is, that because of the options we bought and sold, we have the ability to make money if silver continues to rally, or profit if silver decides to correct towards the downside. The risk on the trade is limited, and can be realized if the silver market remains neutral during the life of the options. As always it is important to establish your risk tolerance before entering the trade and monitor the trade to ensure proper risk management is utilized.
Figure 2.0
Trade Recommendation:
Long Calendar Spread
Buy one 1900 May Call
Sell one 1900 July Call
60 cent credit
60 cent risk
I believe that the Bull Run in the silver market is still in its infancy. The fundamentals supporting the silver market are exceptional. The metals markers have demonstrated time and time again that they are a safe haven to investors in times of economic uncertainty. Silver has been a one of the front-runners in the current bull rally in commodities. I also believe that the silver market has a noteworthy amount of upside potential. If you have any capital invested in the stock market, I highly recommend hedging a small portion of your portfolio in to the metals markets. It’s time for investors to put “the pedal to the metal,” and diversify into the silver market!
Now it’s not WHETHER you should invest in commodities - but HOW to invest in commodities.
