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Trade View: Shorting silver on the June 13 Fed hike meeting

Background

We're adding to our tactical gold shorts into the next Fed hike (June 13) with new short silver positions.

This is at 1x capital, so $10m, entry at $16.41/oz with a target at $15.78/oz as well as a time stop of June 14 – the day after the rate hike. Watching gold for signs of this trade idea being wrong, gold closed on Friday at $1293.40/oz... a retracement back above $1330/oz would change the bearish technicals and momentum that have recently plagued the shiny yellow metal. 


Overview of this gold and silver pattern in the current hiking regime... 

• The average performance of gold going into the Fed hike meetings has been -$23.37 or -1.97%
• This would give gold, which closed at $1293.40/oz last Friday: an implied range of $1298.50/oz to $1244.47/oz, with $1270.03/oz being the avg. implied price, a -1.81% move from Friday.
• To put it another way, based on historical data points, the implied move on gold is from +0.39% to -3.78% from $1293.40/oz until the close of Thursday Jun 14.
• Gold has traded lower 5 out of 6 times in this cycle so far, so shorts would have been right 83% of the time for an implied skew of 6.3x (average down move / average up move)
• The average performance of silver going into the Fed hike meetings has been -$0.64 or -3.86%
• This would give silver, which closed at $16.41/oz last Friday: an implied range of $16.21/oz to $15.57/oz, with $15.78/oz being the average implied price, a -3.88% move from Friday.
• To put it another way, based on historical data points, the implied move on silver is from -1.20% to -5.10% from $16.41/oz until the close of Thursday Jun 14.
• Silver has traded lower 6 out of 6 times in this cycle so far, so shorts would have been right 100% of the time.
• A tactical trade view with short gold and silver exposures look compelling, whether expressed outright, or through buying puts and put spreads on the precious metals. The Fed is the key event around this and the Jun 14 date acts as a time stop on the trade view.

Management and risk description

Key Risks

• Geopolitical risks in Europe [In fact our Chief Economist & CIO Jakobsen put a long gold / short USD trade on Spanish political risks] as well as the Korean peninsula escalating over the next 10 days.
• Potential risk-off driven by confusion over potential trade war fears – here we go again!
• A weaker USD and/or lower US yields could give the precious metals a bid.
• The Fed chooses not to hike – highly improbable, yet a good trader must envisage all potential pathways.
• From a technical analysis view, any sustained gold squeezes that take us back above $1330/oz, potentially could reverse the bearish indicators and technicals we are going through.
• Historical patterns come and go in the markets.

Parameters

Entry:  $16.41/oz

Stop: This is a NAV trade and is at 1x capital, so $10m 

Target: c. $15.78/oz

Time horizon: 10-11 days... with a time stop the day after post the Fed June 13 meeting. 

Source: Saxo Bank

 Source: Saxo Bank

 

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