Commodities Roundup: Employment Number Could Be the Writing on the Wall for Silver Prices
June 5, 2009
In the current US economic climate, "less bad" has begun to take on a new meaning. In an age when the general public has grown weary of sour economic news, a "lessening rate of descent" in the economy is perceived as a positive.
Thus, today's monthly non-farm payroll report showing the US economy lost 345,000 jobs in May was considered "good" news. Why? Because economists were expecting the report to show 520,000 jobs lost in May.
While the number is a notable one for economists, it could be quite important to metals traders as well. That is because the number had the effect of stopping the dollar decline in its tracks.
Traders who feel good news on the economy should have the effect of spurring commodities prices have it backwards, at least for now. The pundits talking about "green shoots" in the economy got some confirmation today with a slowing of job loss. The US is still losing jobs, the economy may still be slowing but at least it is showing signs of leveling off. And if the US "levels" off before Europe and other industrialized countries (other than China), its currency could strengthen. If the dollar strengthens, inflation fears ease and money stops flowing into commodities, especially precious metals which are most often used as a direct inflation hedge.
That is exactly what happened today, June 5, 2009.
We at Liberty Trading do not see today's reversal in the dollar as a one-day phenomenon but rather a longer-term turning point. Yes, the dollar can still have moves lower and silver and gold can still have moves higher. However, with all of the "green shoots" talk, none of it could really be confirmed without employment numbers improving. Today they did in a somewhat dramatic fashion and that is significant.
Do not mistake this for a bullish outlook on the economy. Jobs are still being lost, real estate is still depreciating, and businesses are still filing for bankruptcy. And there is more of it ahead. There are some convincing signs now that things are leveling off. That doesn't mean they are going to start getting significantly better any time soon.
What today's number does is takes away the strong tailwind enjoyed by commodity bulls for the past several weeks. As silver was a leader in this rally and volatility is now high, it makes an excellent candidate for call sellers at this time.
The latest rally in metals (or many commodities for that matter) had more to do with speculators and a tumbling dollar than any type of real demand increases due to economic strength. Many hedge funds are still down 30-40% or more from 2008's market collapse. With debt instruments paying little to nothing, fund managers are under pressure to produce. They need to buy something. The falling dollar has brought them heavily into stocks and commodities.
But with interest rates surging, debt instruments will begin to become attractive to investors again as they can now begin to earn a decent return with little risk. This combined with a slowing descent in the dollar, a large fund long position and a record derivatives holding in the silver market by small speculators all point to a top in the white metal for the time being.
The recent volatility has driven call values up substantially. There are call options currently available in December silver offering healthy premiums at the 30, 35 and even $40 strike price. These are price levels at over double the current price of silver.
While December seems like a long way off, even a moderate correction in silver prices could render these options nearly worthless in as little as 60-90 days.
It is true that silver prices do not have to reverse today, tomorrow or even next week. However with a main driver of the silver market bull now somewhat muted, prices will have one major reason not to move higher. With call strikes available at these levels, that should be enough.
Figure 1: Dec Silver June 09
Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.
James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
Optionetics.com ~ Your Options Education Site
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