WOW, the past few days have been nerve wracking for precious metals investors. After a massive run-up that was widely covered in the press, silver almost halved in value and implied volatility in silver options surged. We think this is a great opportunity to jump into a silver trade -- especially selling the vol. In my view, the downside in silver is limited for a few reasons:
1. The macroeconomic fundamentals are still bullish for silver:
a. The Eurozone is still a mess.
b. The US economy and political situation is not much better than the Eurozone.
c. Growth in emerging markets is sputtering and inflation is increasing.
2. Increased margin requirements from a number of exchanges contributed to the sell-off. Once margin calls are met (or accounts are painfully liquidated), downside pressure will ease and we expect to see a bounce in prices.
3. The recent global equity selloff also led to investors selling gold and silver for liquidity.
4. We think that the demand of silver and sold has not changed and the recent price drop was on the supply side.
5. Liberal monetary policy will persist on a global level to combat the current global economic malaise, pushing prices of physical assets higher.
While we like both gold and silver, the volatility in silver is almost twice that of gold and therefore we suggest a vertical put spread sale in iShares Silver Trust ETF (SLV).
Trades: Sell to open 1 SLV October 29 put at $0.95 and buy to open 1 SLV October 28 put for $0.70.
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