Spike for Silver Prices Ahead? This Options Activity Suggests So

May 12th, 2014
in gold, syndication

Special Report from Money Morning

by Diane Alter, Money Morning

After rising as much as 16% earlier this year, silver prices are now nearly unchanged year to date. They're up just 0.2%, while gold has gained 7.2%.

The silver price isn't the only number that's lagging...

Follow up:

Silver's option activity sits near a decade low. That's highly unusual - and won't last.

In fact, the low activity suggests things are about to change for the white metal.

Silver Prices Soar After Low Options Activity

According to Mike McGlone, head of U.S. research for ETF Securities, 30-day silver options volatility is roughly around 12% as of Tuesday's close. While it has ticked up a hair from the 10-year low logged last week, it remains well below the historic average of around 30%. McGlone told Kitco that -

"Volatility is always mean-reverting, so when volatility is that low, it's ready for a big move. I think the path of least resistance is up."

That last time silver volatility dipped into the mid-teens was early 2013, right before silver prices spiked in April. The silver price hit just under $28 an ounce. The time before that was in 2010 when silver dipped to $17.94 in August, just ahead of silver's 2011 breakout to a record high of $48.70 on April 28.

Knowing when the big move up is likely to happen is key - and we have a few more signs that it's happening soon.

How to Follow the Clues to Higher Silver Prices

Telling signs that the silver price is poised to bounce include an unusually high gold/silver ratio, robust retail demand, and strong fabrication use.

And, all those signs are aligning for an upward move in the silver price. Take a look:

  • The gold/silver ratio, a measure of how many ounces it takes to buy an ounce of gold, has rested in the low 50:1 range for the last several years. Last week, the ratio rose to 67.3:1, the highest read since August 2010, when it stood at 67.5.1. Presently, it's at 66.8:1, McGlone said to Kitco. That kind of out-of-whack ratio often signals an upcoming strong performance for silver.
  • Consumer demand for silver coins continues to be healthy. March sales of American Eagle silver coins totaled 5,354,000, up 30% from February's tally of 3,750,000, and up a whopping 59.5% year over year. First-quarter 2014 Silver Eagle sales amounted to 13,879.000. The only other better start to a year was in 2013 when Q1 sales reached 14,223,000. Moreover, holdings in silver exchange-traded funds (ETFs) like the iShares Silver Trust (NYSE: SLV) remain solid, as gold ETFs continue to experience outflows.
  • Demand for silver fabrication (industrial use) rose 6.3% to 865.8 million ounces in 2013, according to The Silver Institute. That was the highest level since 2007, when demand level was at 865.9 million ounces. According to a recent Thomson Reuters GFMS study, silver industrial demand is expected to reach a new high in 2014.

The silver price could remain range-bound near term. Data from The Commodity Trader's Almanac shows silver tends to peak of trend lower in May, reaching a bottom in late June.

That sets the stage for a nice buying opportunity for savvy silver investors. As Money Morning Global Resource Specialist Peter Krauth explains, a lower silver price lures investors in, and the buying triggers a price boost.

At last check, spot silver was trading at $19.32 an ounce, down $0.08, or 0.41%.

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