Silver Volatility Levels Near 10-Year Lows; Possible Trend Change On Horizon?

May 10, 2014

San Francisco (May 10)  Silver prices are nearly unchanged on the year, underperforming the rest of the precious metals complex, and with its sluggish price action, options volatility levels are near multi-year lows.

Having such low volatility is unusual for silver, and one analyst said it’s a situation that’s unlikely to last.

Mike McGlone, head of U.S. research for ETF Securities, said 30-day silver options volatility is around 12%, coming just off a 10-year low made during last week’s price drop.

That’s highly unusual, he said. The last time silver volatility fell to the mid-teens was last year just before silver prices broke in April 2013, and then in late 2010, ahead of the 2011 spike to record highs. Comparatively, silver’s volatility is usually around 30%, he said.

“Volatility is always mean-reverting, so when volatility is that low, it’s ready for a big move,” McGlone said.

The question is where and when.

When it will happen is impossible to fully predict, but McGlone said there are clues to where it might go.

“I think the path of least resistance is up,” he said.

Among the clues that silver may be set for at least a rebound are the high gold:silver ratio, retail investment demand and fabrication use, he said.

The gold:silver ratio is unusually high, McGlone said. The gold:silver ratio measures how many ounces of silver it takes to buy an ounce of gold. For the past few years that ratio has held in the low 50s area. As of last week's close, the ratio was at 66.8:1, McGlone said. During last week’s price drop it rose as high as 67.3:1, which was the highest since August 2010 at 67.5:1. In 2013 the high was 67.2:1 at the end of July and the low was 57.5:1 in September, he added.

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