Fundamentals
Ever since the volatile trading days of early May, Silver futures prices have been in a consolidation mode, with the market now seemingly comfortable trading around the 18.50 area in the December futures. Unlike its more popular cousin Gold, Silver has not really gained widespread favor from investors seeking an inflation hedge or even as a store of safety, which is keeping prices well below historic highs. Part of the reason for Silver's lackluster performance might be due to its use as an industrial metal. Given the mixed economic signals being sent from recent economic reports here in the U.S., it is little wonder that many traders are not excited about the industrial demand prospects for Silver. However Copper prices, which many analysts use as a proxy to determine the strength of the economy, have shown some strength the past few weeks, and if the price rally continues, Silver bulls may once again find confidence in their beliefs and put a bid back in Silver prices. The most recent Commitment of Traders report shows both large and small speculators are holding a net-long position in Silver, totaling a combined 53,410 contracts as of August 10th. Although it seems that the overall long position being held by speculators is large, it is only a little over half the size of the record combined speculative long position of 97,635 contracts seen in March of 2004. This leaves plenty of room for further speculative buying to emerge should prices finally break out to the upside.
Trading Ideas
Traders looking for Silver prices to breakout to the upside in the next few weeks but who do not want the potential risk involved in buying a Silver futures contract outright may wish to explore the purchase of a bull call spread in Silver futures options. An example of such a trade would be buying the October Silver 19.00 calls and selling the October Silver 20.00 calls. With December Silver trading at 18.615 as of this writing, this spread could be purchased for about 0.280, or $1,400 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $5,000 minus the premium paid which would be realized should December Silver trade above 20.000 at option expiration in late September.
Technicals
Looking at the daily chart for December Silver, we notice Silver volatility has subsided since the wild price action seen in May, when Silver prices moved up and down nearly three dollars in less than a month's time. Although prices are now in a consolidation phase, bulls seem to hold the upper hand, as the market is trading above both the 20 and 100-day moving averages. The 14-day RSI has turned positive, with a current reading 57.30. The next resistance point is seen at the 19.000 area, with support found at the 200-day moving average currently near the 17.830 area.
Mike Zarembski, Senior Commodity Analyst