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Friday Q&A - Is it Too Late to Get in On Silver?

By Doug Fogel August 28, 2020 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Hey, Doug Fogel here.

Welcome to the Friday edition of True Market Insider.

Today I’m fielding a question from Dan F., who asks…

A while back, someone recommended buying a call option on SLV, an ETF on silver.

 It’s gone up quite a lot since then – back in May, I think.

 I’m wondering if you still think SLV is a good play now? And if so, how would you play it?

 Dan, thanks for your question.

First off, I made that recommendation – to buy the Oct 14 SLV Call Option for $3 – back on May 20 of this year.

By Aug. 17 (the day I would have cashed out), it had risen all the way to $11.60 – a 286.6% gain.

(Click any image to enlarge)

So would I dive back into SLV again?

Yes, for reasons I'll come to in a second.

SLV is an ETF (exchange traded fund) that tracks the performance of its underlying holdings in the London Silver Fix Price.

These holdings are designed to capitalize on the rise of silver bullion.

Buying the fund right now and holding onto it for the coming months and years will likely earn you a profit.

I say that because we’re probably going to experience significant inflation in the coming years.

(By the way, if you haven't checked out the excellent take on silver, from Guest Editor and precious metals expert Matt Badiali, you can read it here.)

The reason we're likely to see inflation is, the Federal Reserve is hell-bent on causing inflation to rise, as evidenced by its slashing of the target interest rate to near zero back in March.

And if the government keeps showering the economy with helicopter money – like the $2 trillion coronavirus bailout Congress authorized back in April – at some point we will get higher rates of consumer price inflation.

Perhaps disastrously higher rates.

Smart investors are quietly preparing for that possibility through investing in precious metals.

The reason is obvious – gold and silver are forms of “cash” that can’t be debased by government money printing.

Right now – before serious inflation has a chance to slash the dollar’s purchasing power – is the perfect time to hedge your portfolio with precious metals.

And while most people prefer to invest in gold, I think silver is the better play.

The reason is the historical price relationship between gold and silver is out of balance right now.

For the entire 20th century, the gold to silver price ratio was 47:1 – in other words, it took about 47 ounces of silver to buy an ounce of gold.

For most of the 21st century, that ratio fluctuated between 50:1 and 70:1.

As I write this (Friday, Aug. 28) the number is 71:1, with gold selling for about $1,975 and ounce, and silver at $27.50.

I believe this ratio will revert closer to 50:1 as precious metals investors catch on to silver’s upside potential.

Back in May I suggested that investing in SLV was a great way to ride silver’s bull run.

I still think that’s the case.

Right now SLV has pulled back more than 5% from its recent high of $27.00. So we'd get back in at a decent level.

And, just like in May, I’d go with a deep in-the-money call option.

Right now I like the March 2021 21.00 Strike Call option.

With SLV trading at $25.60 as of the Aug. 28 close, the mean price between the bid and the ask is $5.95.

If SLV goes up 10% within the next month – say to $28 or so – the call option would be worth $7.75.

So you’d make a quick 30% gain on this option – 365% annualized.

That’s it for this Friday edition of True Market Insider.

Have a great weekend!

Doug Fogel

Editor, True Market Insiders