September 14, 2012
Silver is mined year-round at a fairly constant rate across the globe. Thus it is somewhat counterintuitive that this metal would exhibit marked seasonal tendencies tied to the calendar. But it sure does. Unlike the agricultural commodities, silver’s seasonality is driven by fluctuations in demand rather than supply. And silver is just entering its strongest time of the year, which is very bullish for it and its miners’ stocks.
The primary driver of silver price action is gold. The vast majority of the time with few exceptions, silver’s fortunes are closely slaved to gold’s. Investors and speculators are only likely to plow capital into silver and drive up its price rapidly when gold is thriving. Gold strength naturally stokes greed for the highly-speculative white metal. And later when gold corrects, traders are quick to abandon silver in sympathy.
Today’s secular silver bull was born way back in November 2001, when silver traded near $4 per ounce (and gold under $275). Since then, silver has catapulted a breathtaking 1105% higher at best as of its latest major high in April 2011! The gains prudent contrarians like our subscribers have won in this sector have been epic beyond belief. But traders can’t forget gold truly is the key to thriving in silver.
From silver’s humble beginnings over a decade ago to this week, the daily close in silver has had a 92% correlation r-square with the daily close in gold. This means that 92% of silver’s price action in its entire secular bull is statistically explainable by gold’s own. 92%! So why does silver exhibit such strong seasonality? Simply because gold does. Silver follows and amplifies moves in gold, both up and down.
Gold’s own seasonality is driven by massive fluctuations in global investment demand. There are times of the calendar year when major income-cycle and cultural factors ignite huge surges in gold demand in various world regions. Because silver so closely mirrors gold, understanding and successfully trading its seasonality is impossible without first studying gold’s. And that discussion is well beyond today’s scope.
But I’ve been doing extensive gold-seasonals research for many years, so if you need to get up to speed simply read my latest essay on that thread. From Asian harvest to Indian wedding season to Western holiday buying to Chinese New Year, gold’s seasonal drivers of outsized investment demand are well understood. And silver’s seasonality is merely a speculation-motivated extension of gold’s own.
Traditional seasonality studies used by futures traders encompass multi-decade timeframes, often 30 years. While hammering out so much data certainly has merit in forging pure seasonality, I prefer an alternative approach. Prices obviously behave quite differently in secular bulls and bears. And we are trading a secular silver bull today. So the most practical seasonality for trading is silver’s in this bull.
Since it was born in November 2001, that’s the year to start crunching the data. And because silver’s price has changed so much throughout this bull, each year’s data has to be individually indexed. Around $33 today, a $1 rally in silver is a great up day. But back in late 2001 around $4, the same $1 rally would have been a speculative mania. Absolute moves simply aren’t comparable over the course of a long bull.
But percentage moves certainly are, a 3% up day in silver in 2001 had the same impact on psychology as a 3% up day in silver in 2012. So these silver bull seasonals index each calendar year individually, off of silver’s first close of that year. This way a 5% or 10% or 20% swing in silver prices looks the same no matter which year (and base silver price) it happened at. And then all these indexes are simply averaged.
The result is the blue line below. Each dot represents the average level where silver happened to be on any particular trading day relative to its first trading day of each year between 2001 and 2012. At an indexed level of 110 for example, silver was 10% higher at that point than its first close of the year on average. Simple standard-deviation bands (yellow) highlight how dispersed the underlying data was.
This silver bull’s seasonality has been, quite simply, awesome. On average over almost 12 years, silver was nearly 22% higher in early December than where it started the year! Straddling a brutal secular-bear decade for investors where the stock markets were flat at best, silver’s performance is phenomenal. This metal has proven itself again and again in this secular bull, even weathering an ultra-rare stock panic.
And once indexed and averaged, silver’s annual advance exhibits major seasonality. Prudent traders, speculators and investors alike, can use these tendencies to their advantage. There are times of the year where the odds of buying relatively low are pretty high. These are great times to add new positions, as long as other technical and sentiment indicators don’t suggest silver happens to be overbought.
And there are other times during the calendar year where there’s a high likelihood silver will be relatively high. As long as other technical and sentiment indicators don’t flag silver as being oversold, these are great times to realize profits on any positions traders are looking to sell. Seasonality is a powerful tool in any arsenal to help determine when silver is likely to be relatively cheap or expensive within any year.
The best place to start our silver-bull-seasonals analysis is actually in late June. Because outsized gold demand evaporates in the summer, the precious metals have long tended to drift listlessly in June, July, and August. I call this vexing grind the precious-metals summer doldrums. And indeed silver suffers it too. Note that on average silver doesn’t tend to regain its late-May levels again until the end of August.
But the low point in that seasonal consolidation happens much earlier, in late June. That is when silver tends to trade down near the lower support of its seasonal uptrend. Seasonally it is the best time of the year to add new long positions in silver and its miners’ stocks. And that is indeed where silver’s first big seasonal rally is born. For contrarian traders who can fight the herd, it is a fantastic buying opportunity.
Interestingly this wasn’t always the case. In my last iteration of this research published in January 2010, silver’s major seasonal low was actually the later August one. But thanks to fears the US wouldn’t raise its debt ceiling in the summer of 2011, gold launched an incredible and anomalous summer rally. Silver rocketed 17.8% higher in July 2011 and another 11.4% by late August! This skewed July’s index higher.
But since fantastic mid-summer silver performance is so rare throughout silver’s entire secular bull, I’m personally more comfortable with the mid-August seasonal low. Silver has suffered through far more poor summers than good ones, and holding silver positions through them is usually a real psychological drag. So silver’s August low is generally a safer time to buy low ahead of the big seasonal rallies. Read more>>