Aside from Wednesday's sharp decline in Silver, it has been a relatively quiet week for Precious Metals. Traders remain focused on the upcoming week's employment data, which should solidify either a 25 bps cut or 50 bps at the September 18 Federal Reserve meeting. We will see JOLTS job opening data and ADP payroll data on Wednesday, initial claims on Thursday, and non-farm payroll data on Friday. The speed of the deterioration in the labor market will play a substantial role if we get the 100 bps in cuts expected for 2024.
Two actions taken by the Chinese Government this week brought back speculation that the central bank is preparing to take new measures to support their economy. First, China's central bank bought 10-year and 15-year government bonds from primary dealers, which was its first bond purchase in nearly two years. Second, China is considering allowing homeowners to refinance as much as $5.4 trillion in mortgages to lower borrowing costs and boost consumer wealth, stabilizing the property sector. These actions could bring another wave of buying in Copper and help propel Silver above the breakout point of $30.54/oz.
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Below is a Daily chart of December Silver futures
Technically, Silver futures continue to consolidate along the 50 DMA, leaving traders "on the fence" about the next possible direction. Historically, September has been a brutal month, with futures declining eight out of the past ten years. One must remember that every year is different, and past seasonal instances have their variations. One benefit is the 87% correlation to Gold, which continues to trade around record highs.
Our approach with our clients in anticipation of a breakout over $30.54 will be using a calculated-risk option strategy, such as a bull call spread. For example purposes, the $30.50-$32.50 call spread for November, which expires on October 28 for a premium of 40 cents or $2,000, would be defined as your max risk on the spread (plus any trading fees). The max gain would be $2.00 or $10,000 per spread minus your initial cost of $2,000 (plus any trading fees), giving you nearly a 4:1 risk to reward or $8,000 if Silver finishes above $32.50 at expiration on October 28. We believe this strategy achieves a low-risk, high-reward profile. If you would like to be up to date on the developments and strategies we recommend to our clients, register for a free two-week trial here: Get the Metals Minute.
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