Time to Look at Silver
I'm not sure I've ever made two trade recommendations in the same week, but you guys should be aware of this opportunity if you're not already. If you're looking for a long term trade with the potential to return a double, triple, or even more over the next year, you need to take a look at silver. Gold is on an absolute tear right now, and people have begun quietly talking about $2,500 an ounce gold in the next two years.
The relationship between gold and silver has always been linked and, as gold prices itself out of practicality, more and more people will be buying into silver. Over the 20th century, gold traded at a pretty steady 40x multiple over silver. In other words, if silver was $5 an ounce, gold was somewhere around $200 an ounce. Today the price of gold is 61 times the price of silver. The spread has to narrow at some point, and all indications are that gold isn't dropping to fill the void. Silver has to go higher.
If only a return to a century's worth of equilibrium happened, silver would have to rise to $31.80 an ounce. It's at $20.80 as we speak. But what if gold does rise to $2,500? Even at today's 61:1 spread, that prices silver at $41 an ounce. At 40:1 we're looking at $62.50 silver.
So how do you play it without getting your ass handed to you in the futures market? Once again, ETFs come to the rescue. The silver ETF (NYSE:SLV) is probably the best way to go. Like GLD, SLV is hitting all time highs. If you want an investment you can make and then forget about for awhile, just buy SLV. If silver goes to $30 an ounce (I predicted that would happen by the end of this year at the beginning of this year. Now that looks a little aggressive, but you never know), you're up almost 50%.
As usual, though, if you're looking for the big score the options are the way to play it. Depending on how far you want to go out, you can set yourself up for a double, triple, or even 5-bagger if silver runs like a big dog on the beach. The January 2012 SLV 20 Calls are selling for around $3.50 apiece right now. If you think the move will happen sooner, you can buy April 2011 SLV 20 Calls for $2.25 right now. Personally, I think you'd do fine with either, but the greater upside exists in the Jan 2012 calls. That's a lot of time for SLV to stretch its legs.
Here's how it makes a difference. Let's assume you have $5,000 to invest and that silver hits $30 an ounce by January 2012. You could take that $5,000 and buy 250 shares of SLV today. When SLV gets to $30, those shares are worth $7,500. That's an excellent return. However, if you took that initial $5,000 investment and bought 15 of the Jan 2012 SLV 20 Calls, they'd be worth at least $15,000 when SLV hit $30 - and a lot more if it happened quickly. (Here's the math: $30 share price - $20 strike price = $10 in the money. $10 x 100 shares per option = $1,000 intrinsic value per option. $1,000 per option x 15 options = $15,000 in intrinsic value + whatever time value remains = YOU'RE FUCKIN' DANCING)
As far as I'm concerned, this is another one of those no-brainers, and that's why I'm sharing it with you. If I can make y'all a little dough in the time we share together, I'm pretty okay with that.
Have a great weekend, guys.