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Silver: How low is too low?

Commentaries & Views

That was the question many Crude Oil investors asked themselves before prices plunged to $-40.00/barrel in April of 2020. The structural problem with Crude Oil remained with a lack of places to store 1000 barrels resulting in a frantic "bid for storage" as the product is non-deliverable to investors while only being kept at approved locations. Silver, on the other hand, is a "whole nother ball game," meaning that the delivery process of the Silver futures contract results "When futures buyers take delivery of metal warrant, they can choose what to do with it. For example, they can choose to leave it on warrant in the depository, take it off warrant and sell the metal privately or ask for its removal from the depository for use or storage elsewhere, a process known as load out."

To give you some background, back in 2008, I had a hunch that something explosive would eventually happen in the Silver market, and it was a combination of four different factors, and I felt I only needed one or two to work out for the price to hit. So the first thing I did was call around and ask about the cost of buying 5,000 ounces of Silver; shocked by the premiums and lack of inventory, I decided to open a futures account and purchase a futures contract. My premise was simple; prices would rise because of increasing solar demand and outstrip existing supply. Mining operations would cease their hedging strategies (shorting paper silver) and allow prices to float freely to capture more profits. The remaining shorts (prop trading desks and speculators) would be left scrambling to cover. More on this later.

Fast forward to today, and looking at the monthly chart of Silver, my interest is peaking again that prices are maybe getting a little too cheap. Looking at the latest COT report, it appears the only real shorts that are out there are the "producers," telling me that miners are concerned about covid and supply chain issues. Currently, the demand is there, and supplies are tight; however, manufacturing and industrial demand account for about half of Silver, and logistical problems are causing the bottlenecks. Like Nestle having lower profits because they could not logistically get their hands on enough Cocoa, once supply chain issues resolve themselves, I believe your two best bets in the precious metals space are Silver and Platinum. I went back through 20 years of my trading strategies to create a Free New "5-Step Technical Analysis Guide to Gold." The guide will provide you with all the Technical analysis 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 Gold.

Last week I outlined a strategy in the Gold market using the Micro Futures, this week, we are looking at Silver. Therefore, we recommend those suitable clients with 82 days till expiration buy the 5,000 ounce March Silver $24.50 - $27 call spread for 35 cents or $1,750 a piece plus commissions/fees. The maximum gain is $12,500 minus commissions/fees and achieved if Silver closes above $27 at expiration on February 23, 2022. The maximum loss of $1,750 plus commissions/fees occurs if Silver at expiration is below $24.50 an ounce on February 23, 2022. If Silver does move higher before expiration, we can liquidate the spread any time the market is open for a potential gain. Remember the last "Silver Squeeze" occurred was on a Sunday night when the futures and futures options were open, and those that waited for the "U.S. Equity options" open were left disappointed. If you have never traded futures or commodities, I just completed a new educational guide that answers all your questions on how to transfer your current investing skills into trading "real assets," such as the 10 oz Gold futures contract. You can request yours here: Trade Metals, Transition your Experience Book.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.