Commodity contracts actually led the way higher…

Crude, cocoa, sugar and live cattle built on their price base.

The corrections in the overall bullish trends proved to be buying opportunities when prices were down.

Of course, this is easy to see in retrospect. Buying dips has been an easy, but profitable, strategy since the depths of the financial crisis.

Solid overall trends remain intact. What has been going up continues to rebound and rally. Other declining markets in Treasury yields, Natural Gas and the US Dollar are resuming the dominant downswing.

And here lays a big potential mover…

Silver never quite hit the $50 an ounce price at late April highs. The combination of the multi-year trend that doubled prices in 2010 and again in 2011 plus the emotion of a crowded trade led to asset unwinding.

The Silver Springboard

Sideways trading on Silver for the last two months within a range has held the key support…

The $30 level had tempered upside rallies three times!

In addition, the dollar has formed a triple top at 76 to set the tone for lower greenbacks. A similar dollar channel looks to resume the downtrend inversely to the silver uptrend when you look at the six-month charts side by side.

It doesn’t take much expertise to identify the extreme silver highs coincide with the extreme dollar lows.

You should watch this trend. As the dollar continues to fall, silver could rise even higher. Just be sure not to chase the highs…you will want to buy near support to maximize potential profits.

[The Sleuth’s Note: Last month, Alan introduced you to playing silver’s pullback. If you missed it, simply click here. There are many ways you can play silver right now. One way is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV). If ETFs are not for you, you can start by looking at these two companies: Silver Wheaton Corp (NYSE:SLW) and Coeur d’Alene Mines Corporation (NYSE:CDE).

Plan your trade...you could see profits on the next silver rally.

But of course, before buying anything...make sure to do your research.]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

Springboard Your Way To Silver Profits was originally featured in the Penny Sleuth.

A perfect example is the effect the news has had on the silver market recently. But, with silver prices dropping, it presents new buying opportunity for long-term commodity investors.

While many good information sources that play it straight do exist, some have an agenda and ideology that almost prohibits an objective view. The hype around short-term events for viewers devalues long-term planning and investments. Unfortunately this transfers fear through osmosis, prohibiting clear, unbiased decision-making— all in an effort to make sure you return for more.

The conversations about a double-dip recession, government default or Dollar demise are economic possibilities, but not probabilities at this time. Fiscal issues must be addressed, but the market action is telling a more optimistic story. In early May the stock and commodities markets were at multiyear recovery highs. When and if the market direction changes will just mean additional opportunity.

Can’t Dive Below 335

Major profit-taking sales in commodities from the May 2 high point has seen asset unwinding back to the January breakout point. The Commodity Research Bureau Index (CRB) of resources as a whole has dropped 10% in the mid May to the key technical 335 area, which was a halfway recovery of the 2008 extreme highs to 2009 extreme lows. As a trader, this news is a potentially bullish buying area for a number of markets that are now near long-term uptrend supports. The reward-to-risk is much more attractive at these levels for continuation of global demand growth.

The overall basket of commodities has been in an overextended, yearlong strong upward trend. One of many major pullbacks, the last few have been bullish buying opportunities, which encouraged top pickers to go short. Timing a major market reversal is nearly impossible and almost always a gambler’s ruin.

Buying against support and trend levels has been successful in the past. A close below the 335 halfway 2008-2009 recovery point on a weekly basis would get attention and renewed evaluation of the trend. It is definitely too soon to make that call.

Silver Sliver

A solid example of retracement to support is in the oft-emotional Silver market. Too far and too fast caught up with long traders who overstayed their welcome when danger signs flashed brightly. The unwinding triggered built-up exit stop losses that were protecting profits for most.

The explosive run to highs near $50 an ounce had begun with a breakout above the key $30 cap on prices in February. Attempts were made in mid- and end of December, with the actual never-look-back bust-out coming a few months later. The uptrend is still intact, and the recoil to the original level needs to be watched for a halt in the current decline.

Now that the luster is diminished in Silver, it becomes an attractive potential play.

[Editor’s Note: There are many ways to play silver right now. One way you can play this pullback is by taking a look at iShares Silver Trust (ETF) (NYSE:SLV)]

It ALL Comes Back to Commodities!

Alan Knuckman
Penny Sleuth

How You Can Profit from the Silver Pullback was originally featured in the Penny Sleuth.

In retrospect that was clearly a “profitable” idea. But more than a few investors who acted on silver are scratching their heads, wondering just how long they should hold. It’s great to take gains in silver, but those gains aren’t real until you know when to get out.

This brings me to a recent reader question:

“I was wondering if you feel Silver will continue to run a bit more like Gold? (I know they run together, but wondered if silver has gone too far?)”
- C.B., Houston TX

For starters, markets can go much higher or lower than we think or we feel. When “think” is the key emotional measurement, it often leads to trouble and lack of trading discipline. Truthfully, the less you think, the easier it is to evaluate trading opportunities.

Every financial investment has the same time tested process and methodology. Here’s the list I’ve shared with my Resource Trader Alert readers in the past:

1.    Identify
2.    Execute
3.    Manage
4.    Maximize

The number one focus always has to be on risk: What is the downside, and what are the implications on the portfolio if wrong?

Only after determining that the potential rewards outpace the potential risks does it make sense to move forward with a trade.

My preferred strategy is to trade limited-risk options with enough time to be right. The option vehicle has unlimited upside with limited loss – that’s why they’re ideal for traders who can’t sit and watch the markets all day long.

Silver Psychology

As of this writing, the recent high price in silver futures currently sits at $49.82. That’s the level prices reached briefly on April 25. It’s also a historically significant price – you see, the long-standing target from silver’s 1980 rally (aka the Hunt brothers’ fiasco) sits at a round, psychological $50 an ounce. Gold had long ago achieved those 30-year-old levels and it only made sense that silver would as well.

Previously, we haven’t seen a major unwinding that made the reward to risk appealing enough for a bullish silver play. The danger has been too high for our entry criteria and the market has gone without us. Sometimes it is better to miss a play.

With the price chart accelerated to almost unsustainable levels a breakdown is in the works. We’re already seeing it in the market’s last few trading sessions.

[Editor’s Note: This pullback in price could be the ideal entry point for silver. If you’re not comfortable taking on silver options trades, there are more accessible alternatives to get silver exposure in your portfolio today. The easiest comes in the form of the iShares Silver Trust (NYSE: SLV), an exchange traded fund that holds physical silver on behalf of its investors.]

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

May 3, 2011

A Trader’s Take: Should You Still Buy Silver? was originally featured in the Penny Sleuth.

Our resident commodity expert, Alan Knuckman, chimes in with his thoughts on squeezing out additional gains from silver right now…]

The November stall in stocks has not negatively impacted the metal complex, which is on the way to new highs once again. The rally in gold and silver is especially impressive against the headwinds of the dollar.

Remember how metal prices earlier this year maintained power even at the U.S. Dollar index highs in June? That’s a true sign of internal strength.

Fundamentals are supportive as well for higher prices with demand for investment grade silver coins filling a void as gold may be out pricing itself for some. At $27 an ounce a whole bunch of these anti-currency chips are affordable for most everybody who seeks safety in real monetary value. Plus the numismatic angle (interject that word into the holiday dinner to impress family and friends) dwarfs the meltdown monies of coins at this time.

This from the Financial Times:

Silver coins are selling at a record pace as investors – especially in the US – seek to limit their exposure to the dollar. The world’s top mints have seen their silver coin sales jump to record or near-record levels, and they and coin dealers are working overtime to meet the surge in demand from investors…

While the price of gold is now well above the nominal record it touched in 1980, silver remains below the $50 an ounce it hit that year. Dealers said investors were buying silver in expectation that the so-called “poor man’s gold” could soar in price.

…The interest is primarily from retail investors, [but] private bank clients and sovereign wealth funds have begun to increase investing in silver, bankers said. Although prices are largely driven by investor sentiment, silver – unlike gold – is also being helped by buoyant industrial demand.”

This heightened silver interest forced Agora Financial’s 5 Min. Forecast to call on me to clarify a reader’s concern about a recent climb in trading requirements at the exchange.

Hopefully I address both sides of the coin… so to speak:

Question: “I noticed your comments,” a reader writes, “about recent drops in the price of gold and silver partly due to recent increases in the margins by the Chicago Mercantile Exchange.

“Could you please explain whether there are any laws and regulations regarding when and how much these exchanges can increase their margins (fees), or are they allowed to manipulate the prices of the markets whenever they want?

“Please also comment whether the above significantly changes your views on the future of silver, gold and other commodity prices.”

My Response: Trading futures/commodities outright is a leveraged play with theoretically unlimited risk. The gains and losses occur at a fast rate because of the approximately 20-to-1 deposit requirements versus paying the full cash value.

To trade a gold contract, long or short, the deposit is over $6,000 with a cash value on the 100 ounces today at $134,000. That upfront cash would be enough to pay for nearly a 5% one-day move in gold before putting the account in negative territory.

Unlike stocks, that ‘margin’ is not borrowed funds, but an actual cash deposit. The amount of margin you need to put up is a function of volatility. As individual markets get more or less active and the total daily dollar amount moves, a change in the deposit may be required. It is infrequent, not even a month- to-month occurrence, but sometimes necessary for protection if the cash value of the contract has significantly increased.

The exchange wants the margin to be low enough to ensure liquidity and, therefore, efficient trade execution for all sides. At the same time, the deposit has to be large enough to protect counterparties when large moves occur.

I have found over my 20-year career that when the margin requirements are increased, it doesn’t impact the traders on the right side of the market — only those who are undercapitalized when the trade is going against them. Either they put up more money or get out.

The exchange has no vested interest in the markets moving up or down as they make money on a small transaction fee per trade.

But leveraged, high-risk plays aren’t the only way to trade commodities. In fact, the recommendations that I give my Resource Trader Alert readers are strictly limited-risk options plays where the maximum financial exposure is the premium paid.

The bottom line is this: while risk-averse investors are staying away from precious metals right now, the professionals aren’t. In fact, I’m still monitoring the metals market for a price set-up that I like. I’ll be sticking with the same strategy that led my readers to multiple metals gains in the past 12 months.

Don’t eschew silver just because it’s seen shares rise in 2010. You may be leaving potential profits on the table…

It all comes back to commodities,
Alan Knuckman
Penny Sleuth

December 2, 2010

Should You Still Be Betting on High-Growth Silver Plays? was originally featured in the Penny Sleuth.

But one thing I’d like to stress in today’s Sleuth, with the Volatility Index ($VIX) around 25, is that I believe we’re still at a reasonable level of volatility – and if anything, last week’s correction was long due.

The sell off was the worst since March 2009 with a 5% drop in the last three days of the weak week. Put in perspective, though, 15 Month S&P highs were made Monday January 19th – only a few trading days ago.

My focus lies on the recently humbled physical commodity markets that were down 6.5% as the raw materials sector retreated on Chinese concerns. Their coordinated announcement of slowing growth from the official 10% latest quarter GDP jump is designed to temper inflationary pressures – but contrary to some published obituaries the Red Dragon is still very much alive.

Last week has definitely gotten our attention but remember we have seen this action repeatedly before. For the last 10 months, every time the market looks like it will turn down it has responded with a rally to new relative highs.  Take a look:

One component in pricing for the options that my Resource Trader Alert readers invest in is volatility. For our purposes it helps us determine simply to buy an outright option if price are cheap or to purchase a spread if expensive (in relative terms). An increase in volatility is an increase in price movement – and don’t forget we need the markets to move in order to make money on our positions.

Stocks had slowed in the last couple of weeks and the $VIX, which measures the S&P 100 stocks, was solidly below 20 and as low as 16 January 11th. No fear, no movement as you saw quiet market conditions with tighter daily trading ranges while the market searched for a catalyst for prices.

Earnings have begun once again feeding the beast with its necessary diet of market information to digest. Banks have been permitted to make back some money from interest rates held low by the Fed. They had to make some money the old fashioned way:  they Earned it with the risk free policies of the Central Bank allowing them to replenish their dwindled cash coffers.

Is This Just a Pullback, Jack?

After any turnaround (in any market), traders look for price support. The logic is to start small with not making new lows for an hour, then a day, then the week. For example, the highly traded e-mini S&P 500 futures declined to 1089 in today’s session but not below Friday’s lows at 1086 and reversed to move higher on the day.

As a group commodities have done much the same with Gold and Oil closing higher after testing last weeks lows. Crude actually made a lower low at 73.97 Monday for the March contract but closed higher on the day which is a positive technical sign with that reversal on lower volume than Friday.

Another clue can be taken from the action in Treasuries, which benefited from the stock uncertainty last week. 30-Year Bond futures are off by nearly half a basis point as some fear has subsided in the short term. The next round of market volatility will tell us a lot about the market’s future direction.

It may be cliché, but my nearly 20 years of experience makes me most afraid when others are not and gives me a sense of calm when the public is frantic and unhinged.

This from Bloomberg:

Traders are piling into bets that the biggest sell-off in U.S. shares since March will increase stock market volatility, pushing call options on the VIX Index to the highest level in 19 months.

The VIX jumped 55 percent to 27.31 in the last three sessions, the biggest surge since February 2007, as demand rose for options to protect equities from losses. Futures show traders are betting it will remain above 25 for six months after averaging 20.29 over its two-decade history.

The VIX had its biggest annual drop ever in 2009, falling 46 percent, as the smallest stock-market swings in two years reduced the value of equity derivatives. The gauge is still down 66 percent from a record 80.86 in November 2008.

These emotional inputs have been successfully interpreted and managed within my readers’ disciplined RTA trading plan through ups and downs. Risk is always quantified and controlled with our strategies and that does not change as volatility increases, but opportunities do. We’re going to take advantage of those opportunities going into 2010.

It all comes back to commodities,
Alan Knuckman

January 29, 2010

Don’t Panic from the Pullback… Profit from It! was originally featured in the Penny Sleuth.

Here’s everything you need to know to profit from the best metal ETF on the market.

Forget gold and platinum -– and even exotics like palladium -– the only precious metal that you need to own right now is silver. That may come as some surprise given the rally that gold has had this year, and given the analyst sentiment that has pushed the SPDR Gold Trust ETF (NYSE: GLD) to the world’s sixth-largest holder of gold bullion -– ahead of Switzerland and China.

But from a valuation standpoint, there’s no question that silver is the best metal to buy right now.

Making a value case for a commodity –- like gold, silver, or oil –- isn’t quite as simple as it is with a stock. That’s because while stocks have easily defined assets, the value of a commodity is simply whatever people are willing to pay for it. It all comes down to scarcity, or how much of a given commodity is out there.

In the case of precious metals like gold or silver, the metal is worth something because there isn’t a lot of it out there. Likewise, nonrenewable energy sources like oil are valuable because it’s in limited supply.

Traditionally, investors have looked at the relationship between gold and silver’s prices to determine whether one of the metals presented a good value play. At present, the gold-to-silver price ratio sits at approximately 59:1, which while high recently is nothing compared to its peak of 98:1 back in 1991.

But the fact of the matter is that the gold-to-silver price ratio is a worthless measure of the two metals’ value. To get a more meaningful indicator, let’s take a look at each metal’s “market capitalization” -– the value of all of “above ground” gold or silver multiplied by its price.

The results are startling…

You see, unlike gold, which has limited industrial uses, silver is used in a number of manufacturing processes. Some of these processes, known as non-recoverable industrial consumption (NRIC), result in the destruction of the metal and lower the amount of above ground silver. According to silver analyst Theodore Butler, in the last six decades NRIC has resulted in more silver being consumed than mined – from 10 billion ounces above ground in 1950 to just 1 billion today.

Compare that to gold, which has seen its above ground supply increase 150% to 5 billion ounces during that period.

As recently as 1975, the value of the world’s gold was 23 times higher than silver’s. Today, with depletion taken into account, gold is currently priced 250 times higher than silver. That’s a shocking difference.

And it’s one that suggests silver is grossly undervalued as an investment right now.

The Best of the Silver ETFs

The best way to play silver right now is clearly exchange-traded funds (ETFs).

While buying bullion direct is a good option for silver investors, the premium you’ll pay suppliers — often in excess of 5% — and the costs and risks associated with storage make it a poor choice for the vast majority of investors.

Investing in silver companies also adds a lot of risk over ETF plays. That’s because while precious metals are a point of refuge for investors when stocks are flailing, companies that mine the metals aren’t immune to the market’s overall trend –- they might do “better” than the rest of the market, but in a bear run that has most equities down double digits, “less worse performance” is little consolation for losses.

Not only do ETFs offer pure commodity exposure that’s nearly free of market irrationality, the best funds physically hold the silver bullion that your shares represent.

A vault filled with silver bars is a big draw for investors who are nervous about a fund failing to meet its investment objectives.

Though silver’s ETF offerings aren’t as varied as gold’s right now, there are several funds worth looking at right now. The biggest of the silver funds is the iShares Silver Trust ETF (NYSE: SLV), which has a market cap of $4.97 billion, and is one of the largest owners of silver bullion in the world. Other smaller funds include the PowerShares DB Silver Fund ETF (NYSE: DBS) and newly formed ETFS Silver Trust (NYSE: SIVR).

But in truth, the only silver ETF worth trading right now is the stalwart SLV. That’s because the other two funds lack the liquidity, cost-effectiveness, and options that SLV offers. And right now, SLV is on the verge of a technical breakout that could equal double-digit gains in days…

Taking a look at the chart above, the first thing that becomes clear is the uptrend that this fund has been on for the last year. And year-to-date, SLV has been constrained within a tight trading channel, which it’s currently right at the top of.

While nearing the top of a channel would normally signal a bounce back down, in this case, with SLV currently at a 52-week high and little risk of profit taking, the potential for a breakout above the trading channel is very real. If shares break through the top of the channel at the $17.70 mark, the breakout is underway and it’s time to consider grabbing onto shares.

Supercharging Your Silver Play

As usual, options are the best way to supercharge this silver play. With a move imminent, a shorter-term out of the money call option on SLV packs the highest profit potential. That could mean as much as triple-digit gains by the end of the month…

That said, if your risk tolerance is lower, the fundamental potential of silver easily justifies going with a more conservative option trade for this fund. You can take a look at all of SLV’s available option at Yahoo Finance.

Cheers,
Jonas Elmerraji

October 9, 2009

This Precious Metals ETF Could be Gold’s “Silver Bullet” was originally featured in the Penny Sleuth.

Silver is the most flexible metal on earth. We’re not talking about its malleability. We’re talking about how it is used.

Let’s take the point of view of those expecting a quick, painless recovery. In that case, silver is a great investment. It has many industrial uses other precious metals don’t. As the global economy kicks back into gear, we’ll see more demand from electronics manufacturers, battery makers and solar cell producers — all of which use silver in their products.

There are thousands of uses for silver in industry. It is used in water purification, medical machinery and, of course, jewelry. All of these industries will begin to pump out products again, which will put a strain on our limited aboveground silver reserves.

Now take a look at the world through the eyes of those thinking we are going to see a second collapse. The best place to store wealth is in precious metals. Of course, gold is the most common place to store cash, but silver is no slouch.

From 2006 until now, the physical holdings of silver funds have jumped 11-fold. That’s because more people than ever are interested in holding silver — or at least a fund that holds silver.

Silver is both a way to safely store your wealth and to spend it. Over the past several centuries, silver has been used as currency. In fact, our own U.S. dollar was once backed by silver. For those expecting the worst, silver is a must-own. These ETF holdings don’t even take into account how many people are stocking up on personal physical holdings.

There’s no shortage of demand. Everything is in place for another massive run-up. Gold already broke the $1,000 per ounce threshold last month. And it busted through its 2006 highs this week. Even so, silver is still lagging around $16.50.

David Morgan from Silver-Investor.com notes that when gold breaks through $1,000 and stays there for a length of time, silver will shoot up. He even went as far as to say silver will break through last year’s $21 high and hit $25 per ounce sometime in 2010.

Are we suggesting you buy silver? Well, yes. But we have a much better way for you to make money off this rise…

Buying shares of a major primary silver miner like Silver Wheaton (NYSE: SLW) would do the trick. It’ll certainly leverage its massive reserves and production against silver’s rise and return larger profits to shareholders than simply buying silver will. But even these gains will be miniscule compared with what you could see with small-caps.

We have an opportunity to get option-sized gains on silver’s rally without the downside or expiration hassles of actually buying options. By buying shares in a junior silver miner, like Hecla Mining (NYSE: HL) or Mag Silver (AMEX: MVG), we can take advantage of huge price swings without worrying about it expiring worthless, as options often do.

In just the last week, Hecla is up 15%, and Mag is up another 5%. As I write, these stocks are continually pushing into new 2009 highs ever day. When the silver boom gets traction in the market, expect small players like these to rocket as a result.

Sincerely,
Jim Nelson

October 7, 2009

Finding Option-Sized Gains from $25 Silver was originally featured in the Penny Sleuth.

In the last year, my Resource Trader Alert readers have already had the chance to book 143%, 148%, even 200% gains thanks to the commodities market. And in the current economic climate, as commodity prices start to heat up once again, the profit potential is amazing.

Here are the resource plays that I see rocketing right now…

Gold and Silver are leading the markets higher with the decline in the U.S. Dollar.  The greenback is at its lowest levels in since September 2008.  Gold is solidly above $1000 an ounce and looks positioned to easily make new all time highs on a course to $1200, from my projections.

Silver has made an impressive rally as well – one that I see continuing into the upper teens.

Recently I’ve been concerned about the lack of recent strength in Crude compared to new highs in stocks and metals.  Last week, that disconnect was repaired with a 5% move in prices putting oil solidly above $70 a barrel again. And it looks like oil hasn’t stopped its ascent either…

More Fuel for Higher Market Prices

The Organization of the Petroleum Exporting Countries (OPEC) did a good job of pushing oil prices up this summer. While OPEC managed to boost oil prices in the last six months, at current levels black gold is still a far cry from where it was a year ago – and where it could be again soon. This from Bloomberg:

“OPEC’s success in more than doubling oil prices since a five-year low in December will probably persuade ministers to maintain production quotas after this week’s meeting.

“Reducing shipments beyond record cutbacks last year would endanger the global economic recovery, the Organization of Petroleum Exporting Countries’ president said last week. Oil rose to $75 a barrel on Aug. 25, the price Saudi Arabian King Abdullah says is fair for consumers and producers.”

A major flaw in the governments’ unfair obsession with speculators is the failure to acknowledge the role of OPEC in energy prices.  They are a cartel!  Traders can buy and sell but only OPEC colludes to determine price levels.  Until hybrid cars, solar and geothermal technology, and algae fuel replace black gold we can fight the battle for financial gains.

We’ll continue to do just that.

It ALL comes back to commodities,
Alan Knuckman

September 14, 2009

What You Need to Know About the Future of Silver, Gold and Oil was originally featured in the Penny Sleuth.

That’s why the greatest inflation fighter in the world is under stress. Of course, we’re talking about gold. Gold is– and always has been– the safest place to put your cash. It has been traded as currency, stockpiled to backup paper money (think Fort Knox), and hedge spend-happy governments. Today, its hedging attribute is important.

Over the past few months, it’s become more and more difficult to buy physical gold. Even if you do locate it, what you actually pay is quite a bit more than its spot price.

In many cases, these buyers were willing to spend up to 25% more for gold than its value. That’s like your broker taking a quarter for every $1 share you buy.

So, if gold is too expensive, where can investors turn? Well, there’s always gold’s little brother…

Silver is not commonly thought of as an inflationary hedging tool. That is, until times get tough. And I don’t think you can find too many times tougher than right now.

Silver is often referred to as “the poor man’s gold”. We call it opportunity. You see, during the 1978-1980 precious metals rally, silver showed up late. Almost all of the large gains in silver came in the last few months.

We see the same events unfolding this time around. As we pointed out in the past, gold has always traded for about 16 times as much as silver, until the past few decades. Currently, the ratio sits around 71. When this number falls, silver booms.

Macroeconomics and ratios aside, there is one final reason we expect an enormous silver rally…

About 3 out of every 5 ounces of silver come from base metal mines. Roughly 28% of all silver comes from copper mines and another 32% comes from lead/zinc mines. Both of these sources are decreasing — and in some cases, completely shutting down — production due to the overall commodity market.

Only 10% of all silver comes from gold mines, which leaves just 30% of the total market to pure silver plays like Coeur d’Alene Mines Corp., Hecla Mining, and Pan American Silver. These serious cuts in production, gives us pure silver investors the inside track to cornering the silver market.

We are seeing a perfect storm brewing in the silver market. If you get in now, you might just beat the rush…

Sincerely,
Jim Nelson

March 17, 2009

How You Can Win with Silver was originally featured in the Penny Sleuth.