While most risk assets have not only recovered sharply from their declines earlier this year, but in fact have made new highs, it strikes me that both gold (GLD) and silver (SLV) remain well below their former highs. As long as there remains a bid to risk, I believe both commodities are poised to move back higher over the next few months.
Looking at GLD first, we see that after peaking above 500 in late Jan, it had a 21%+ pullback to ~ 400 and has since managed to “only” rally about 4% since the late March bottom (far less than the move we have seen in stocks). What I do like is that the decline/pullback “held” the August uptrend support and the 200-day moving average never was even close to being breached to the downside.
GLD declined ~ 21% from the Jan highs to the March lows and was able to hold the August uptrend support as well as the 200-day moving average
What should also support the upside bid to gold here is that after a sharp counter-trend rally, the US$ index (DXY) broke below the Jan uptrend support and now looks like it can continue its longer-term decline. A weaker US$ should be supportive of all commodities, especially gold. Of concern for any US$ bulls too should be the fact that the dollar has stopped rallying even though yields in the US have continued to move higher. If/when we see a move back lower in yields, I would expect further US$ weakness. Recall, it was when the DXY traded below 96 that GLD peaked above 500 (~ 20% higher from current levels)
US$ index (DXY) recently broke below the Jan uptrend and now appears it could move back to the Jan lows (when GLD peaked above 500)
Against this potentially bullish backdrop for gold, we have seen 2-month (June) 40-delta call implied vol move down from a high near 40 to a current 23 and it now trades at a decided discount to where 60-day realized vol trades (currently ~ 32). In addition, while the closer to the money 40-delta call vol has come in, the further out of the money (lower delta) call vol has remained better bid. This means call skew has been moving up, which favors owning upside call spreads to express a bullish view (in a limited-risk basis).
GLD 2-month (June) 40-delta call vol is down from nearly 40 to 23 and now trades at a steep discount to 60-day realized vol
10-delta/40-delta call skew also starting to move up (bottom chart), making call spreads more favorable to own
Given this attractive setup on a fundamental, technical and volatility basis, I strongly favor owning upside GLD June structures at this time. Here is a trade I would consider adding currently:
Buy GLD June 18th 440 calls
Sell GLD June 18th 485 calls
Costs ~ $6.95 (GLD 423.18 Fri close ref)
Trade Details:
- Buying the GLD June call spread following 20%+ decline in gold from the Jan highs
- Pullback to support, a weakening US$ and favorable vol setup are all reasons why I like this trade currently
- Call spread starts ~ 4% higher, has a 5.5x to 1 max payoff at expiration and is capped to the upside ~ 15% higher and just below the all-time highs
- Selling the upside 485 calls covers ~ 20% of the cost of buying the 440 calls
- Limited-risk structure can be added to an existing long/bullish gold position, or as an entry-point trade following pullback/consolidation
- Please reach out to me or the 22V sales team for updated pricing and execution capabilities
Green area shows where June call spread trade makes money at expiration
Silver (SLV) upside trades also looks very attractive
I like buying SLV upside June structures for many of the same reasons why I like gold (sharp pullback from the highs, potentially weaker US$ and a much better vol setup now than earlier this year). Silver declined by ~ 45% from the Jan highs, but that was after it more than DOUBLED from November thru Jan). Much like gold, it pulled back to technical support (Nov uptrend and 200-day moving average) and has since held.
SLV declined by ~ 45% from the highs (after more than Doubling since Nov) and remains above the Nov uptrend and 200-day moving average
Just like in gold, we have seen a massive drop in 2-month upside call vol premium in silver. SLV 40-delta implied vol has dropped by 110 to under 50 since late Jan, and it too now trades at a sharp discount to 60-day realized vol. In addition, the 10-delta 2-month calls now trade at ~ 10 points over the 40-delta calls. This dynamic makes owning SLV upside call spreads out to June a very attractive proposition as well in my opinion.
SLV 2-month (June) 40-delta call vol is down from 110 to below 50, and now trades at a sharp discount to 60-day realized vol
The June 10-delta calls now trade at a 10-point vol premium to the June 40-delta calls
Finally, with the AI trade back in full force, silver should start to play “catch-up” given its importance to that buildout. This is something that Jordi Visser has argued for and wrote about a month ago (here). With SLV call vol now even much lower than when he wrote about silver in early April, the setup to own “cheaper” SLV structures out to June 18th is perhaps even more attractive. Here is a trade I would consider adding at this time:
Buy SLV June 18th 73 calls
Sell SLV June 18th 90 calls
Costs ~ $2.35 (SLV 68.29 Fri close ref)
Trade Details:
- Buying the SLV June upside call spread following sharp pullback from the Jan highs
- Call spread starts less than 7% higher and is capped more than 30% higher (at the Jan 30th “gap lower” highs)
- Structure offers a 6.25x to 1 max payoff on the limited-risk trade
- Selling the 90 calls covers nearly 25% of the cost of buying the 73 calls (thanks to attractive call skew)
- Call spread can be added to an existing bullish silver position, or as an entry-point trade given sharp pullback and attractive setup
- Please reach out to me or the 22V sales team for updated pricing and execution capabilities
Green area shows where June call spread trade makes money at expiration
