Hedging Price Risk in Silver in a Pivotal Week
This is a big week for financial markets, a long-anticipated election in the US is likely to have widely varying impacts across major asset classes. Safe haven assets such as silver stand to benefit from the uncertainty.
There is also an FOMC meeting scheduled on 7/Nov (Thu) where the Fed is widely expected to cut rates by 25 basis points. A lower rate environment also serves as tailwind for silver.
Finally, the Chinese parliament is expected to announce details of fiscal stimulus on 8/Nov (Fri). Fiscal stimulus in China also stands to benefit silver through higher investment demand as well as industrial demand.
In what should fundamentally be a strong week for silver, prices have entered the week on a bearish note following a 3.4% decline last week. While fundamental outlook for Silver remains bullish, this eventful week may drive unwanted volatility. Indeed markets are expecting large moves in silver prices with silver options IV near a 1-year high.
Investors can strategically deploy CME silver weekly options along with a long position in silver to capitalize on the fundamental increase while remaining protected against volatility.
BULLISH FUNDAMENTAL OUTLOOK FOR SILVER
Mint Finance covered some of silver’s bullish fundamental drivers in a previous paper.
In brief, robust growth from the photovoltaic (PV) sector is driving high demand. PV installations are surging, with global solar installations up 29% year-over-year, driven by aggressive climate policies and energy transition goals. This increase has directly boosted silver consumption, essential for PV production.
At the same time, silver markets have stayed in a supply deficit for the past four years. Silver miners have struggled to keep pace with the rapidly increasing industrial demand.
China’s massive stimulus package—its largest since the pandemic—also plays a crucial role, freeing up liquidity to revitalize its struggling economy. This stimulus supports sectors like PV and electronics, key industries for silver usage, while bolstering consumer confidence, which translates into heightened demand for silver in electronics and jewellery.
Investment demand for silver has started to pick up pace. Since July, U.S.-listed silver ETFs have seen over $942 million in inflows, particularly after the Fed’s rate cuts, which makes non-yielding assets like silver more attractive.
HIGHER SILVER JEWELLERY DEMAND IN INDIA
The recent festival season in India saw high demand for silver as buyers opted for it over gold. Silver sales by volume are expected to have increased 30-35% YoY while gold sales fell by 15% according to data from the Indian Bullion & Jewellers Association.
Rising investor interest in silver is partly due to its relative affordability compared to gold, which is trading at an all-time high. While high gold prices are dampening demand, especially for physical gold and jewellery, silver remains more accessible, supporting increased investment.
Rising investment demand, particularly for jewellery, risks pushing silver further into deficit. While jewellery demand for silver had been modest in recent years, 2022 saw a significant increase. According to the Silver Institute, jewellery demand is projected to grow by 4% in 2024 (but below 2022 levels), with actual demand potentially exceeding this due to the strong seasonal trend. Increased demand would further tighten silver supplies, likely driving prices higher over the next year.
UPCOMING FOMC MEETING AND CHINA STIMULUS TO DRIVE SENTIMENT
China’s parliament has started it five-day meeting on 4/Nov (Mon) and is expected to announce the details of the fiscal support on 8/Nov (Fri). Analysts suggest the fiscal plan could reach 10 trillion yuan ($1.4 trillion), with most funds likely allocated to refinancing local government debt. A substantial fiscal stimulus plan is likely to support silver prices.
Recent economic data from China has also shown a recovering industrial sector as China’s manufacturing PMI rose from 49.8 to 50.1 in Oct as the manufacturing sector shifted into expansion after 5 months of contraction. In case the trend continues, stronger industrial demand also stands to push silver prices higher.
SILVER IN THE MIDST OF CORRECTION DURING UPTREND
Silver continued its bullish momentum from September into October but has corrected sharply over the past week. During the rally earlier this year, when silver prices corrected, they were able to find support at the 38.2% and 61.8% Fibonacci levels. With Silver presently just above the 38.2% level, it may find support here.
Silver’s performance in the past two months has closely aligned with monthly pivot points. In both September and October, prices tested these pivot levels before moving higher. However, recent tests have shown smaller deviations from the pivot compared to prior months, suggesting that volatility could push prices slightly lower during this month’s test.
There is strong reason to believe that the general bullish trend is likely to continue into next year. According to a poll at the LBMA precious metal conference, delegates expect silver prices to rise to USD 45/oz over 2025, reflecting a 37% increase from present levels. Precious metal analysts were highly optimistic about silver, stating that higher industrial demand combined with continued supply deficit was likely to drive strong gains.
SEASONALITY SUGGESTS POTENTIAL FOR LARGE GAINS IN NOVEMBER
Silver prices closed out October with a 4.6% increase but are currently nearly flat for November. Historically, November has been a mixed month for silver, with an average price increase of 1.88% since 2000, though with high standard deviation. Notably, only 42% of Novembers have shown positive gains.
Despite this variability, past performance shows periods where silver either consistently declined or consistently rallied over multiple Novembers. Over the last two years, November has seen significant growth in silver prices; if this recent trend persists, silver could experience strong gains this month.
SILVER’S PERFORMANCE AROUND ELECTIONS
Certain safe haven and risk assets (gold, silver, BTC) stand to benefit from a Trump presidency. Historically, elections have impacted silver prices in varying ways. Following the Trump victory, silver stands to benefit.
Looking at silver’s historical performance in the two weeks following elections since 1980, prices increased by an average of 0.7% when a Republican replaced a Democrat president.
The Democrat-to-Republican shift has led to price rallies in two-thirds of cases.
SILVER’S PERFORMANCE AROUND FOMC MEETINGS
As mentioned, lower rates have a positive impact on non-yielding investment assets such as silver while also boosting industrial demand during periods with loose monetary policy. During the Fed easing cycles in 2001, 2007, and 2019, silver reacted positively to Fed rate cuts in 68% of cases (performance measured 1 week after FOMC meeting with monetary easing) with an average of 0.9% appreciation on the CME Silver front month contract.
CME FedWatch tool is suggesting that a 25-basis point rate cut is most likely at the upcoming meeting on 7/Nov with a probability of 98%. As the outcome is largely anticipated, the impact of the meeting on silver prices may be minimal.
HYPOTHETICAL TRADE SETUP
Silver remains bullish with strong fundamental drivers including the rapid growth in the PV industry and strong investment demand.
This week, several major events are expected to drive significant volatility in the silver market. While these events are generally anticipated to boost silver demand, prices may remain unstable and could see short-term declines.
Silver is currently trading near its support levels, but increased event-driven volatility this week could lead to significant price swings. In late October, for example, silver briefly surged nearly 4% above usual resistance levels during short bursts of volatility. Although trading volume remained concentrated near the support level, the risk of sudden, sharp moves remains. This could result in a long silver position being prematurely closed out.
With a long position in silver futures at risk from near-term event risks, investors can deploy CME weekly options to hedge a long position from near-term volatility which increases tail risk.
In the following hypothetical trade setup, investors can combine a long position in CME micro silver futures expiring in December (SILZ4) at an entry of 32 with a protective put using CME silver weekly options expiring on 8/Nov (Fri) (SO2X4) at a strike level of 31 (delta 20, premium of 0.087/oz or USD 435) offers a compelling trade setup while remaining hedged against near-term volatility.
Using a delta-20 put option keeps the position fully delta-hedged for the week, as the delta of the long micro silver position aligns with the option’s delta at 20. Since each micro silver contract is one-fifth the size of a full contract, this setup effectively maintains the hedge.
In case prices dip below 30.64 by Friday due to volatility from the election, FOMC meeting, and China parliamentary meeting, the put option would offset any losses from the futures leg.
In the later part of the month, the outlook for silver is likely to be bullish given the fundamental factors highlighted above, in case prices rise, the position would become profitable above 32.44, offsetting the premium paid for the short-term option.
The scenarios in which the position loses:
1) In case prices remain between 30.64 and 32.44
2) In case prices fall below 30.64 following the put option expiry on 8/Nov
The scenarios in which the position profits:
1) In case prices fall below 30.64 before the put option expiry on 8/Nov
2) In case prices rise above 32.44 at any point
It should be noted that it would be prudent to set a stop loss on the long futures position following options expiry at 31 to minimize losses in case of a decline after options expiry.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
There is also an FOMC meeting scheduled on 7/Nov (Thu) where the Fed is widely expected to cut rates by 25 basis points. A lower rate environment also serves as tailwind for silver.
Finally, the Chinese parliament is expected to announce details of fiscal stimulus on 8/Nov (Fri). Fiscal stimulus in China also stands to benefit silver through higher investment demand as well as industrial demand.
In what should fundamentally be a strong week for silver, prices have entered the week on a bearish note following a 3.4% decline last week. While fundamental outlook for Silver remains bullish, this eventful week may drive unwanted volatility. Indeed markets are expecting large moves in silver prices with silver options IV near a 1-year high.
Source: CME Group CVOL
Investors can strategically deploy CME silver weekly options along with a long position in silver to capitalize on the fundamental increase while remaining protected against volatility.
BULLISH FUNDAMENTAL OUTLOOK FOR SILVER
Mint Finance covered some of silver’s bullish fundamental drivers in a previous paper.
In brief, robust growth from the photovoltaic (PV) sector is driving high demand. PV installations are surging, with global solar installations up 29% year-over-year, driven by aggressive climate policies and energy transition goals. This increase has directly boosted silver consumption, essential for PV production.
At the same time, silver markets have stayed in a supply deficit for the past four years. Silver miners have struggled to keep pace with the rapidly increasing industrial demand.
China’s massive stimulus package—its largest since the pandemic—also plays a crucial role, freeing up liquidity to revitalize its struggling economy. This stimulus supports sectors like PV and electronics, key industries for silver usage, while bolstering consumer confidence, which translates into heightened demand for silver in electronics and jewellery.
Investment demand for silver has started to pick up pace. Since July, U.S.-listed silver ETFs have seen over $942 million in inflows, particularly after the Fed’s rate cuts, which makes non-yielding assets like silver more attractive.
HIGHER SILVER JEWELLERY DEMAND IN INDIA
The recent festival season in India saw high demand for silver as buyers opted for it over gold. Silver sales by volume are expected to have increased 30-35% YoY while gold sales fell by 15% according to data from the Indian Bullion & Jewellers Association.
Rising investor interest in silver is partly due to its relative affordability compared to gold, which is trading at an all-time high. While high gold prices are dampening demand, especially for physical gold and jewellery, silver remains more accessible, supporting increased investment.
Rising investment demand, particularly for jewellery, risks pushing silver further into deficit. While jewellery demand for silver had been modest in recent years, 2022 saw a significant increase. According to the Silver Institute, jewellery demand is projected to grow by 4% in 2024 (but below 2022 levels), with actual demand potentially exceeding this due to the strong seasonal trend. Increased demand would further tighten silver supplies, likely driving prices higher over the next year.
UPCOMING FOMC MEETING AND CHINA STIMULUS TO DRIVE SENTIMENT
China’s parliament has started it five-day meeting on 4/Nov (Mon) and is expected to announce the details of the fiscal support on 8/Nov (Fri). Analysts suggest the fiscal plan could reach 10 trillion yuan ($1.4 trillion), with most funds likely allocated to refinancing local government debt. A substantial fiscal stimulus plan is likely to support silver prices.
Recent economic data from China has also shown a recovering industrial sector as China’s manufacturing PMI rose from 49.8 to 50.1 in Oct as the manufacturing sector shifted into expansion after 5 months of contraction. In case the trend continues, stronger industrial demand also stands to push silver prices higher.
SILVER IN THE MIDST OF CORRECTION DURING UPTREND
Silver continued its bullish momentum from September into October but has corrected sharply over the past week. During the rally earlier this year, when silver prices corrected, they were able to find support at the 38.2% and 61.8% Fibonacci levels. With Silver presently just above the 38.2% level, it may find support here.
Silver’s performance in the past two months has closely aligned with monthly pivot points. In both September and October, prices tested these pivot levels before moving higher. However, recent tests have shown smaller deviations from the pivot compared to prior months, suggesting that volatility could push prices slightly lower during this month’s test.
There is strong reason to believe that the general bullish trend is likely to continue into next year. According to a poll at the LBMA precious metal conference, delegates expect silver prices to rise to USD 45/oz over 2025, reflecting a 37% increase from present levels. Precious metal analysts were highly optimistic about silver, stating that higher industrial demand combined with continued supply deficit was likely to drive strong gains.
SEASONALITY SUGGESTS POTENTIAL FOR LARGE GAINS IN NOVEMBER
Silver prices closed out October with a 4.6% increase but are currently nearly flat for November. Historically, November has been a mixed month for silver, with an average price increase of 1.88% since 2000, though with high standard deviation. Notably, only 42% of Novembers have shown positive gains.
Despite this variability, past performance shows periods where silver either consistently declined or consistently rallied over multiple Novembers. Over the last two years, November has seen significant growth in silver prices; if this recent trend persists, silver could experience strong gains this month.
SILVER’S PERFORMANCE AROUND ELECTIONS
Certain safe haven and risk assets (gold, silver, BTC) stand to benefit from a Trump presidency. Historically, elections have impacted silver prices in varying ways. Following the Trump victory, silver stands to benefit.
Looking at silver’s historical performance in the two weeks following elections since 1980, prices increased by an average of 0.7% when a Republican replaced a Democrat president.
The Democrat-to-Republican shift has led to price rallies in two-thirds of cases.
SILVER’S PERFORMANCE AROUND FOMC MEETINGS
As mentioned, lower rates have a positive impact on non-yielding investment assets such as silver while also boosting industrial demand during periods with loose monetary policy. During the Fed easing cycles in 2001, 2007, and 2019, silver reacted positively to Fed rate cuts in 68% of cases (performance measured 1 week after FOMC meeting with monetary easing) with an average of 0.9% appreciation on the CME Silver front month contract.
Source: CME FedWatch
CME FedWatch tool is suggesting that a 25-basis point rate cut is most likely at the upcoming meeting on 7/Nov with a probability of 98%. As the outcome is largely anticipated, the impact of the meeting on silver prices may be minimal.
HYPOTHETICAL TRADE SETUP
Silver remains bullish with strong fundamental drivers including the rapid growth in the PV industry and strong investment demand.
This week, several major events are expected to drive significant volatility in the silver market. While these events are generally anticipated to boost silver demand, prices may remain unstable and could see short-term declines.
Silver is currently trading near its support levels, but increased event-driven volatility this week could lead to significant price swings. In late October, for example, silver briefly surged nearly 4% above usual resistance levels during short bursts of volatility. Although trading volume remained concentrated near the support level, the risk of sudden, sharp moves remains. This could result in a long silver position being prematurely closed out.
With a long position in silver futures at risk from near-term event risks, investors can deploy CME weekly options to hedge a long position from near-term volatility which increases tail risk.
In the following hypothetical trade setup, investors can combine a long position in CME micro silver futures expiring in December (SILZ4) at an entry of 32 with a protective put using CME silver weekly options expiring on 8/Nov (Fri) (SO2X4) at a strike level of 31 (delta 20, premium of 0.087/oz or USD 435) offers a compelling trade setup while remaining hedged against near-term volatility.
Using a delta-20 put option keeps the position fully delta-hedged for the week, as the delta of the long micro silver position aligns with the option’s delta at 20. Since each micro silver contract is one-fifth the size of a full contract, this setup effectively maintains the hedge.
In case prices dip below 30.64 by Friday due to volatility from the election, FOMC meeting, and China parliamentary meeting, the put option would offset any losses from the futures leg.
In the later part of the month, the outlook for silver is likely to be bullish given the fundamental factors highlighted above, in case prices rise, the position would become profitable above 32.44, offsetting the premium paid for the short-term option.
The scenarios in which the position loses:
1) In case prices remain between 30.64 and 32.44
2) In case prices fall below 30.64 following the put option expiry on 8/Nov
The scenarios in which the position profits:
1) In case prices fall below 30.64 before the put option expiry on 8/Nov
2) In case prices rise above 32.44 at any point
It should be noted that it would be prudent to set a stop loss on the long futures position following options expiry at 31 to minimize losses in case of a decline after options expiry.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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