Gold/Silver: The only economic model and ratio you need

A wake-up call is happening in the global economy, along with a shift change from reflation to something else. I am not sure what that something else is, but it is somewhere between deflation and stagflation. Besides those two, I am confident the Fed found itself trapped between a rock and a hard place; meanwhile, the Delta variant presents fresh economic downside risks. Fresh lockdowns are unlikely in the U.S. however, several countries are already seeing their economic conditions deteriorate. China has seen its growth stall leading them to cut their reserve requirement while Spain is down 7% on the month, and Japan has declared a "state of emergency," to name a few.

Rate of change Y/Y GDP growth vs. Inflation model

Interestingly, inflation data will continue to ramp up in the U.S. in Q3, while forward-looking GDP growth forecasts will be revised lower due to supply-chain issues and labor shortages. Backtesting models indicate that this will become a more challenging environment for small-cap stocks while supportive for Gold. We continue to welcome any weakness in the Gold market as an opportunity to position for the back half with year-end price targets north of $1925/oz. To further help you understand the quantitative analyses of the precious metals markets, we created a free "Gold Trends Macro Book," updated with silver slides. You can request yours here: Free Gold Trends Macro Book.

Weekly Gold Chart

Gold Strategy

Last week I wrote that "We continue to add to our strategy below as Gold and Silver are trying to solidify a technical bottom," while this week Gold held steady above key psychological support at $1800/oz while firmly above trendline support at $1775/oz. If you are one of our clients and have been working with us and are looking to position in Gold for the long run, we suggested consider using FOUR Micro 10 oz December Gold contracts per $25,000 and buying TWO at 1775 and TWO at 1685, with a stop at 1640. Doing such would ideally risk $3,600. We would look to a gold target of 2100/oz, which would allow for a profit of $14,800. If you would like to learn more about the strategies we are implementing or learn more about technical analysis, we created a guide to provide you with all the steps to create an actionable plan used as a foundation for entering and exiting the market. You can request yours here: 5-Step Technical Analysis Guide to Precious Metals.

Gold/Silver Ratio

Daily Silver Chart

March Silver Strategy

Silver is becoming oversold from Gold based upon the Gold/Silver ratio and trading back at resistance at 70:1. Based on the next up-leg bull market we expect in Gold, the ratio provides another opportunity to position in the Silver market. Silver futures happen to be one of the most liquid markets, trading nearly 23 hours a day and bid offers closely resembling the spot market. With the firm belief that Silver will continue to trend higher over the next nine months, we are recommending to our clients with as little 5-10k in risk capital to position themselves in a calculated risk "call spread" with a 1:3 risk to reward scenario.

We are constructing the spread by purchasing the March 2022 Silver $28 call while simultaneously selling the March 2022 Silver $30.50 call. Since Silver futures are 5,000-ounce contracts, every one-cent move represents $50, and every dollar move represents $5,000. Since this spread is two and a half dollars wide, its maximum value would be $12,500, and the current cost of the spread is 50 cents or $2,500 plus any commission and fees. That also represents your maximum risk. The maximum gain would occur with the price of March Silver Futures closing above $30.50/oz at expiration on February 23, 2022. Maximum gain is $12,500 minus $2,500 (cost) minus your commission and fees leaving you around $10,000 (give or take your brokerage). The spread anytime the futures are trading can be liquidated before the expiration; however, it may not capture the entire max profit due to the time remaining. If you would like to be up to date on the developments of our strategies in the futures and commodities markets, please register for a Free two-week trial by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up.

Good luck and good trading,

Phillip Streible

Chief Market Strategist


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Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results.

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