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Silver And U.S. Debt Default

Tuesday October 15, 2013 11:22


Fundamentally, typically silver trades as both a precious metal and as an industrial metal. So when trading silver it can move higher if precious metals are considered a "flight to quality". On the other hand, if the outlook on the overall economy and equity markets are extremely bleak then silver can go lower. You see silver is a valuable commodity in terms of it's industrial use in electronics and manufacturing. When I say extremely bleak, I'm not talking Lehman Brother's bleak. Like when the recession first hit and the E-mini S&P fell from a high of 1586.75 in October 2007 to a low of 665.75 in March of 2009. During that same time period Silver went from a high of $14.64/ounce in October of 2007 to a low of #11.49/ounce in March of 2009. During that time Silver also made a lower low in October of 2008 of $8.40/ounce.

Don't misunderstand me I do not hold the belief that a United States debt default to our creditors if it occurs, will have the impact that the Great Recession did. It seems as though over the last few years the precious metals have been very finicky in terms of trading as a "flight to quality" or "safe haven". My experience has been that when there is a small amount of economic fear or insecurity that they tend to trade as a "flight to quality" or "safe haven", but not always because I've also seen the United States Dollar Index futures and United States Treasuries take on that role. What I can say is this; when there is the idea or perception that there will be an enormous amount of U.S. Dollar printed, i.e. QE Infinity then Silver has a tendency to rally big time. On the other hand, when the scenario of too much fear, but less than Lehman fear, occurs enough to take down the ES, YM, and NQ in a big and fast way Silver trades as an industrial metal and a riskier asset all at the same time. The theory here is that when funds have to meet margin calls for stock purchased because of a stock market crash then there is a fire sale of assets and commodities alike, Silver included.

The question then remains, what will the impact of a United States debt default have on Silver prices? Fundamentally, this is the most difficult question I have had to speculate on all year...and the year is almost over! Fundamentals on Silver have been a huge challenge all year anyway so why should now be any different. Let me just say what the most obvious fundamental way Silver could go if we default. If we can't pay our debts then our currency, the mighty USD could fall sharply. I wouldn't think that anyone would be interested in United States Treasuries backed by a country that can't pay it's bills. So that can only leave the precious metals like Silver as "Safe Havens" or "Flights to Quality". Right? Well maybe, because the real key to me, will be the equity markets and how they will react.

So the answer to the question of where Silver will go if "we", the good 'ol U.S. Of A defaults on it's creditor's is this. They won't. Unlike the rest of us they will raise their debt limit if only temporarily, kicking the can down the road for a little longer until the politicians can come up with a real solution. I wish I could raise my own debt limit, but that's not up to me, it's up to my creditors. I must be missing something here. In the meantime, I will stick to the technicals and the only real market mover for Silver that I have seen and that is Quantitative Easing and inflation concerns.

Technically, in the short to mid term on the daily December Silver chart below, the market is in what I would call a sideways trend or range bound. The reason I say this is because the 9 day SIMPLE MOVING AVERAGE (SMA, red line) and the 20 day SIMPLE MOVING AVERAGE (SMA, green line) are both moving sideways. In fact they are practically right on top of each other as they move sideways.

In addition the top line of the BOLLINGER BANDS (light blue shaded area) is also pointing sideways and even though the bottom line of the BB's (light blue shaded area) is not pointing sideways it is stabilizing and making what looks to be a range. In fact that is why I say the market is range bound. This range started, according to the BB's, right around September 23rd and even though the bottom line is somewhat curvy I can still see the bottom of the range. Other than making the low since the 23rd of $20.63/ounce on October 1st, the bottom of the range is about $21/ounce even. The top of the range that I see is the top line of the BB's which pointing directly sideways at a price of $22.74/ounce.

Finally, from a technical stand point on this December Silver chart the 50 day SIMPLE MOVING AVERAGE (SMA, the blue line) is on a nice slow steady upward climb. This would be more of a lagging indicator on this particular chart, but

Daily December Silver Futures Chart

Technically, below on this December Monthly Silver chart the very first thing I notice is how the market has been on a downward move ever since it made the previous high of $49.82/ounce back in the month of April 2011. Secondly, I notice that the 9 period SMA (red line) has crossed under the 20 period SMA (green line) back in about the month of April 2012. However, they did not start to point on a sharp angle downward until April 2013. At the same time the Silver market itself has been trading below the 9 period SMA (red line). To me, this is what I have coined a SUPER-TREND down. Next, not only is the market trading below the 9 and 20 period SMA's it is also up at what has been in my eyes resistance over the last 3 months. Meaning every time the Silver market has come up to the 9 period SMA (red line) is has stalled out and gone on to make new lows.

  The monthly chart is a long term indicator, but still very important to me. It is nice to see the 9 day SMA (red line) acting as resistance so effectively in keeping the SUPER-TREND lower. Oddly enough though, the 50 period SMA (blue line) is pointing on a nice steady slope higher. It is a lagging indicator to me on this chart, but maybe that says something about the longer term view of Silver prices. See the monthly chart below and remember this is just my technical observation on a December Comex/Globex Sold monthly chart with some of my favorite technical indicators added to it. Only time will tell where we go from here. Past performance is not indicative of future results.

Monthly December Silver Futures Chart


Well if the SILVER MARKET holds on the daily chart in the range bound sideways movement that I am seeing now, a play could be to sell naked options with protection or hedge in the form of futures possibly. However, this selling of naked options does have unlimited risk and the account must be funded properly for this to be considered. On the other hand, if we think the market will break out to the downside and quickly come out of the range the way it came in which is down- not only could the afore mentioned play be used, but a play that calls for the buying of puts in a 3 to 1 ratio with a call for a hedge could be a possibility. For more details on months, strike prices, expiry dates, risk, and reward get in touch with me and we can talk about it. Thanks for checking out my commentary.  

 By Matt McKinney

Futures, options and forex trading is speculative in nature and involves substantial risk of loss. These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with zaner, or its associated companies, may have positions in recommended and other derivatives.

For customers trading options, these futures charts are presented for informational purposes only. They are intended to show how investing in options can depend on the underdlying futures prices; specifically, whether or not an option purchaser is buying an in-the-money, at-the-money, or out-of-the money option. Furthermore, the purchaser will be able to determine whether or not to exercise his right on an option depending on how the option's sticke price compares to the underlying future's price. The futures charts are not intended to imply that option prices move in tandem with futures prices. In fact options prices may only move a little.

The limited risk characteristic of options refers to long options only and refers to the amount of the loss, which is defined as the premium paid on the option(s) plus commissions.

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 precious metal products, 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.
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