Meet Gold’s Little Brother… and Two Ways He Can Make You Money

The aftermath of Brexit created an absolutely beautiful “blue light special” for equities. And even gold – specifically SPDR Gold Shares (NYSE: GLD) – moved higher, peaking around July 8th at $130.52.

Amid all the excitement, though, you probably didn’t notice gold’s “little brother.”

But you should have…

This often-forgotten commodity correlates pretty well with gold and lasted one week longer, peaking at $19.39 on July 13th.

And you still have a chance to make a profit.

In fact, here are two different ways you can do so…

Of the Two Primary Precious Metals, Silver is Outperforming Gold in Total Percentage Gains

At the beginning of the month, we talked about SPDR Gold Shares (NYSE: GLD) and how you could capitalize on potential trading opportunities (especially if things looked weak in the equities markets).

Now clearly, the markets shook off the Brexit surprise as though it were a news event providing and astounding “discount” for equities. As you know, the markets hit new record highs. And both gold and it’s “little brother,” silver ran up in price.

Both of these have softened up a bit while the markets have broken out to their current highs.  So now the question is if there’s going to be a full-scale swoon in these precious metals, or if they’re simply taking a “breather” before making their next moves higher.

As you’ll recall, I showed you a couple of trade ideas on GLD. And today, I’m going to show you two potential ways to secure some profits on silver.

But before I do… let me show you what has gone on with both silver and gold by looking at the gains they’ve made since their December 2015 lows.

Take a look at this chart on SPDR Gold Shares ETF (NYSE: GLD):

GLD is trading around $127, which is a 27% gain off its lows in December of about $100.

Now let’s compare that to silver’s move on a percentage basis using a chart on iShares Silver Trust, (NYSE: SLV). As you’ll see, silver is (from a percentage gains perspective) outperforming GLD.

SLV is trading at $19 off its December lows of about $13 – equating to a percentage gain of 46%.

Silver is much lower in price. That has much to do with its higher percentage gains when, truthfully, it correlates pretty well with gold most of the time.

Silver, unlike its “big brother” gold, is used more and more as an industrial metal. And that means that it’s not just being mined to have in place for a rainy day apocalypse. Instead, it’s being used in a variety of ways, so it’s going to be a bit scarcer in the end than gold.

Both silver and gold are used as investment vehicles. But if we ever come to the situation where we’re facing another recession, foreign central banks will focus more on gold. This makes silver more sensitive to the global economy and has been deemed more volatile than gold. But in those times of global economic weakness, whether perceived or real, we may see silver separate itself from gold and outperform it.

Where Silver Could Be Headed in the Next Month

When using my proprietary Money Calendar tools and looking at the green on the screen for SLV, I see the potential for a slight bounce higher in price of about 2 ½ points over the next 30 days.

Look at the technical pattern on SLV, and you can make a case for this recent formation being a pennant. A pennant is another type of continuation pattern, similar to the ones we discussed last week.

The pattern can help you assess a target to the upside by taking the differentiation in price between the bottom to the top of the pattern represented by the green dash line.  This price differentiation has it pegged about 2 ½ points higher, based on the pole at 17 to the top of the pole at 19.

Isn’t it uncanny that Money Calendar also shows about a 2 ½ -point move over this time frame as well?

And that means we’ll want to look at long call options trading opportunities…

Please keep in mind that I’m not actually presenting these as recommendations.

But I want to show you a couple of ideas that have the lowest percentage move needed in order for the options to double in value. They both need the same percentage move of 8.28%.

From an options trading perspective, you could potentially buy-to-open four contracts of the $18.50 calls and six contracts of the $19 calls if you set your maximum risk per trade (say $500). Since the bother need about the same price move percentage of the underlying stock, you could potentially take in more profits by managing your trades this way.

One last thing…

I’ve shown you how silver has outperformed gold since their December 2015 lows. And while I’m not going to say that you should choose one over the other, silver has some advantages over gold and, of the two, is the metal with the better chance to outperform on the percentage gain front.

Here’s Your Trading Lesson Summary:

Both silver and gold are used as investment vehicles. But although silver has been deemed more volatile than gold, in times of global economic weakness, we may see silver separate itself from and outperform gold.

Have a fantastic weekend – and stay cool!

Good Trading,

Tom Gentile

11 Responses to “Meet Gold’s Little Brother… and Two Ways He Can Make You Money”

  1. Why would you think that the price of silver would go up if the economy is going to slow and silver has a strong industrial usage? A slowing economy would seem to indicate a lessening of demand for silver.

  2. You recently sent an excellent article about diversification for options traders. The gist of the article was that options traders should strive to have a balance between short and long positions in case there is a larger market downtown caused by some major and unexpected event. I agree.

  3. thanks for the technical analysis… that helps. Good looking trade. But do you have any “heads-up” advice on any particular silver miner stocks to possibly buy call options on for a more ” focused ” play on silvers continuing rise in price?

  4. With Zero interest growing, earlier this week, Dutch bank ABN Amro (ABN.AS) became the first large bank in the world to announce plans to pass negative interest rates on to customers, my thoughts turn to Bitcoin and other cryptocurrencies. Is there a safe ETF to invest in? I have recently learned of many cryptocurrencies in development and think that this offers much promise in light of the international currency/credit problems.

  5. Hi Tom, I hear and read about the coming crash related to credit and do agree that this country is in trouble so I am asking about one industry in particular. I am curious where this will go when things start to disrupt overall. I have considered unloading when it starts to rise again yet I think in terms of holding it long. Thank you.

Leave a Comment

View this page online: