Of all the themes for investing in the second half of 2017, the most significant is certainly going to be related to what the Fed continues to do with interest rates. After all, nothing impacts the financial world like a change in interest rates.
A move in interest rates should have a moderate to substantial impact on most stocks, and it has a major impact on fixed income products and many commodities.
Generally speaking, most commodities are priced in U.S. dollars, so as the dollar moves so do commodities.
And since interest rates are the fundamental driver of currency prices – well you get the picture.
But that’s not all…
Interest rates often directly impact the price of precious metals, which can often trade like currencies.
Of course gold is the most prominent example of a commodity which functions like a currency, but silver and to some extent, platinum, can also behave like stores of value rather than raw material inputs. (Silver and platinum have more industrial uses than gold, which is primarily used in jewelry and as a store of value.)
You’d think with the expectations of higher inflation (the reason the Fed is planning to raise rates) that precious metal prices would be moving higher. What’s more, impressive jobs numbers from last week also support the fact that the economy could be on the verge of higher inflation. Accordingly, gold prices have responded as expected, with the precious metal up over 5% year-to-date.
On the other hand, silver is actually down nearly 3% on the year, defying the logical course of action. Even if you look at silver as an industrial metal rather than a precious metal, it should be up due to the increase in economic activity across most of the world. Basically, no matter the reasoning, it doesn’t make a whole lot of sense to see silver prices moving down.
Part of the decline in silver may be due to a mini flash crash last week, where the price dropped over 10% in a matter of minutes. The situation was most likely due to computer-driven orders, and the price quickly recovered much of the loss – but not all. And, the unexpected (albeit short-lived) event could be causing some buyers to shy away from the asset.
Regardless, there really isn’t any good fundamental reason for silver to continue dropping.
In fact, I wouldn’t be shocked to see a 10% gain in the commodity before the end of the summer.
Options action supports this thesis, with heavy call buying going on in iShares Silver Trust (NYSE: SLV).
SLV is the easiest and most popular way to trade silver.
What do I mean when I say options action is supporting my theory about silver going up? Well, over the last thirty days, 80% of the options trades in SLV have been bullish. Moreover, this week, bullish activity has jumped to nearly 90% of all options trades. Options traders are clearly expecting silver to move higher.
The good news is, it’s very cheap and easy to make a bullish trade on silver using SLV options. With SLV trading just under $15, the September 15th 15 call is trading for just $0.50. The ETF only needs to climb to $15.50 in order to break even. Or you could purchase the in-the-money 14.50 calls for just $0.75, with the breakeven point at $15.25. In either case, a move to $16 would double your investment.
With gold up for the year, it makes sense that silver will follow suit in the near future, and make up the lost ground. By using options, you can make a cheap investment in SLV which could result in 100% gains if the ETF simply moves back to its 50-day moving average.
— Jay Soloff
Source: Investors Alley