Tuesday, March 15, 2011

Not a time to Panic. Time to buy Silver and Gold as it's in the bargain bin.

So haven't written in a bit as when I go back to read what I've written over the past few months....Nothing has changed. I'm still doing the same things I was doing on the last blog. Acquiring metal stocks and chip stocks.

Gold and silver went on sale at the beginning of the market today. The reason is people were liquidating things they've made money in the cover the things they've lost money in(margin calls) Pick it up while it's on sale. 

So over the past two weeks I've sold off my chip stocks and started moving my hedges out on the metals to take advantage of the next leg up over the next year. I was a little concerned about the metals prices specifically silver and gold until the earthquake last week in Japan as it seems they had run to hard to fast and needed to back off a bit so I kept my hedges in place(via selling short calls against my long leaps).

This worked out perfectly as the metals have sold off over the past month or so just as I predicted all based on looking at the charts and so as mentioned above, as they have bottomed out I took my hedges off and rolled those options out to match the longterm leaps in the form of a huge call spread. This way I'm still protected if they do fall out of bed, but at the same time I see more upside for silver and gold now more so than even two months ago.

Why do I say this. Simple the fed is going to print us into oblivion with QE2, 3, 4, 5 and so on. They don't have a choice after this disaster going on in Japan. Bernake(Fed chief) watches the stock market and the S&P futures like a hawk. He knows that if people feel wealthy they will spend and that sooner or later that will inflate and get us out of the dark hole we're in with regard to debt. I personally don't agree with this "spend to save" mentality but I do know what that means....higher equity prices....short term and much higher inflation and gold/silver prices long term. You can see the invisible hand reach in and buy up futures at 2-3 o'clock anytime the market has gotten soft over the past 5 months. This can't continue to go forever or can it.....with a printing press sure you can.

How high can silver go......my thoughts are based on research all the way back to biblical times in the value of an oz of silver and if you do the math....too complicated to get into at this moment it comes down to 16 oz for 1 oz of gold which ironically is also the historical measure dating back to forever ago. We've been as high as 87 to 1 and this was the ideal time to buy....which I was and was telling anyone that would listen to do the same. As usual no one brings an umbrella when it's sunny outside. FYI...I always carry one in my backpack wherever I go. :)

We've just recently broken the 40 to 1 ratio which hasn't been done in 30 years so the move is on now for silver. One of two things have to happen, gold down to get silver back in it's historical ratio or silver up. Which do you think will happen? My guess is gold goes to 2 to 3k over the next 3 year and that puts silver at 187.5 an oz. Don't believe me? Let's just say it goes to 2000 and silver only gets to ratio of 20 to 1 instead of down to 16. Still gets silver to 100 an oz.

Do yourself a favor and buy 5 calls or more if you can afford them Jan 2013 30 leaps on the SLV for 8.25 ask price as of right now....just looked, lower is better deep in the money calls and forget about them. If I'm wrong you lose 4k or so Jan 2013, if I'm correct you will be a very very happy person. If you like call spreads sell the Jan 2013 50 against that leap and you profit from the spread and the spread will cost you less.

If you do nothing else and do not follow any advice whatsoever that you hear from anyone.....just simply put this one trade on and like I said forget about it. Don't look at till next year. You will profit as the Fed continues it's printing process.

I'm not a gold bug or a silver roach or whatever you want to call em but I started buying gold back at 250 an oz and silver at 8 an oz. I've followed this metals market for 10 years much like our friend and fellow blogger follows the oil market so pay attention and listen and protect yourself.

If you're interested in looking at more than the SLV, look at SLW(best silver stock in the market only buys silver at contracted rates of $4 an oz) Look at GG, cheapest producer of gold and if you want diversity buy the GDXJ(junior miners) and the GDX(big miners).

Due your Own Diligence and Happy Investing(Trading)

Marty Blackmon


  1. If the price of Silver is increasing why buy it ?

  2. Why not just short gold and go long silver with equal dollar amounts? This why you don't have to worry about which one moves, as long as your ratio theory holds this play makes money and takes up less margin then simply being long one of them. It also takes away the risk of being wrong by calling one of them directionally. You don't even have to use options so you're not losing time premium. Short GLD, Long SLV.

  3. Investing in gold "If the price of Silver is increasing why buy it?"
    My answer ----> Confused? Do you typically buy things that are going to go down? You should only be buying things that are going to cost more in the future not less.

  4. Jason....the logic here is both are going up. Gold and silver. Silver has been on a ripping ride lately and since the historical number has been 16 yet it's taken 30 years to get under 40 as you know nothing ever goes straight up. I don't have a clear crystal ball, just a foggy one that says both are going up. Gold is likely to go up more in the very near term but as I recommend the leaps on SLV who cares. In 2013 both will be much higher. Some are saying to short silver and go long gold. I think that's foolish to make that call personally. Better to buy leap spreads on both and you'll be all set come 2013.

  5. I thought the logic was that the ratio had to collapse to 16:1 and for this to happen either gold had to go down or silver had to go up, or both. An arbitrage play of shorting gold and going long silver with equal dollar amounts allows you to capitalize on this ratio theory without having to burden the risk of guessing which metal moves in what direction. I was just sharing another perspective of profiting from this idea and not suggesting that you are right or wrong on buying silver.

    A friend of mine did this play about ten months ago based on the ratio logic and chart divergence of GLD vs SLV. Only he got greedy and instead of just staying long silver he started writing calls against it. So when SLV shot up he got stock being short GLD and had to deliver his SLV. It wiped out all his gains.

  6. Hello,
    I might take this trade, I'm already long some gold and silver mining shares and share the belief that metals will be higher. I know some suggest a delta between 0.7 - 0.85 when looking for a stock substitute, so in this case that would be the SLV 23-30 strikes. Do you have any guidelines you use when choosing the LEAP strike?


  7. Hello,
    One more thing - generally I like to sell something against a LEAP - in this case I would probably sell the April 37 or 38, with the intent of not wanting to get called away and keep repeating every month. Do you prefer just holding the LEAP naked?


  8. Regarding my first question, I reviewed some material about the LEAP covered call strategy last night. I think a general recommendation is to use a delta of 0.8-0.9, which would generally give you a pretty small extrinsic value of the option and therefore the least time decay. On the downside you pay more for the option so take a bit more risk in the position, but I think that is what I would do.

  9. Jason,
    I feel that silver will at least come down in the ratio but who knows if it will in fact make it to 16 to 1 as history has shown. Your trade could work, that's the great thing about options right? We can trade it differently. I prefer a leap on gold and to sell a in the money call a few months out if you're going to go that route with a long call spread on Silver. Both of these are going up longer term.

    Silver has been going up because it's used in industry as well as an inflation hedge. Gold goes up when things get scary or inflation roars. Japan's issue are questioning everyones belief in the inflation trade but with the fact that they'll have to sell our treasuries to buy their debt which means they print their currency.....inflation will come so at this exact moment gold might outperform silver or they may both go nowhere for a bit but most certainly they will both go up as both gov'ts print to oblivion and I personally don't want to be short gold other than through a long leap and short call a few months out which I do quite often.

    Sandeep, I always buy deep in the money leaps as you suggested so I can ride out the bumps between now and the future by trading around that position so yes I always sell something against it. Most of the time I trade 2 months out upside calls against my leap but as Jason pointed out with his friend the downside to this is if you're right and the stock or silver explodes you either cap your gains or you have to roll out the call extra months. I prefer to roll it out which Jason, I would have done because while owning that leap it's inevitable that any stock or metal will have a sell off in the next 2 years then you take your hedge off. I Pick my poison and my points using technical analysis as well as looking at open option interest at the strikes as well as delta, etc. I love trading around my core position and use the leap as others use their core stock thus why I buy deep in the money.

    This is usually too time consuming for most people thus I mentioned buying the naked call or call spread and forget about it. I personally trade around the core but I love trading....simply said. Good luck.

  10. Sandeep....one last thing....you should take some of your gains on your miners and purchase physical. Paper is paper in time of crisis and if you own the physical you won't be scared out of it when it goes down. Concentrate on acquiring ounces vs. just how much you pay for it. You'll be glad you did 5 years from now.

  11. Marty, appreciate your input. By physical do you mean SLV or are you talking about buying actual bars/coins?

  12. Sandeep,

    Sorry didn't catch your question. I hope you took the trade and if so are enjoying your gains so far with more to come and also are taking the advice to buy Physical. Physical is NOT SLV. SLV gets you nothing but paper converted to dollars in the case of a real melt down in the markets. I prefer holding both stock and physical.

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