Joe Kunkle, Investment U Research Team
With gold and oil hogging the “commodities spotlight,” silver is too often forgotten. However, a new trend is emerging that indicates a major rally may be starting in silver prices and silver related stocks.
Over the past few weeks we’ve seen more and more data that supports a rally in silver: from large institutional money making large bullish bets, to technical indicators of a breakout, fundamental valuations well below where they should be, and a possibility of a massive short squeeze.
The iShares Silver Trust ETF (NYSE: SLV) has gained 18% since the broader markets began to rally in early March, but we could easily see another 25% – or more – in the remainder of 2009.
All in all, they make silver a must-own in any diversified portfolio.
Here’s what the smart money is doing in silver right now, seven reasons we could see a rally in silver prices and a few ways you could position yourself to profit handsomely.
Following the Smart Money
Like gold, silver isn’t just for jewelry and currencies. It is used for many industrial applications, having the highest electrical conductivity among all metals. Silver’s uses require over 832 million ounces for fabrication into and for products every year.
More than 60% of silver production is a result of the byproduct of copper, zinc, and lead mining, which has slowed substantially due to the economic slowdown. And production will remain halted until we see significant economic recovery. In order words, nothing looks to increase silver supply any time soon.
Silver is also a commodity that can be used as an inflation-hedge. With the recent “Dr. Doom” report that the United States is heading into a period of hyperinflation, silver is looking like an attractive alternative to gold.
And the big money is starting to move into this golden alternative. I’m a big fan of following the professional “smart money” flows for insight into their outlook. Last week we got a huge signal.
On Friday, a massive options trade took place in the Silver ETF where a trader implemented a strangle selling strategy using the January 2010 $19 calls and $13 puts, to finance the purchase of 75,000 January $14 calls.
The trader sold 100,000 strangles, so price of the January $14 calls only cost around $0.23 each due to the ratio used. An institution or large investor is making this bullish bet with a lot of conviction regarding where silver prices are heading.
For those of you not as familiar with options trades, this was a $2.25 million bet that silver will continue to rise throughout 2009. This trade could yield $37.5 million if SLV climbs above last summer’s levels of $19. They would lose large amounts of money if silver were to head lower.
Another way to look to see what the “smart money” is betting on is in the Commitment of Traders Report for Silver.
