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ilver 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.
Remember that gold drives silver, and gold’s big autumn seasonal
rally starts accelerating in August. And there is nothing that entices
speculators to silver quicker than a strong gold price. But even though
silver is already on the move, seasonally there is one more good opportunity
to add silver and silver stocks as October dawns. That is the last time
silver tends to trade near seasonal support before it surges.
After clawing back up to its seasonal uptrend’s resistance in
October, silver breaks out in early November and starts surging dramatically.
As the next chart reveals, on average November is the best month of the year
for this metal by far. If you haven’t gone long silver and the silver
stocks before this autumn breakout, there is no sense chasing them after that
point. They are off to the races, galloping strongly.
Silver’s first big seasonal rally tends to peak in early December,
after this metal has surged 16.2% higher on average from its late-June
seasonal low. This is truly an impressive gain in just over 5 months by
anyone’s standards, especially happening consistently seasonally across
more
than a decade. But after this strongest seasonal rally of the
year, silver tends to be overbought and due for some sort of correction.
And it happens surprisingly fast, over a week or two. And at 3.4% on
average, it is mild. Why? November also happens to be gold’s strongest
calendar month on average, and the yellow metal holds those gains through
December. So without gold selling off, there is really nothing to scare away
silver speculators. Silver’s mid-December lull is important because it
marks the last major seasonal buying opportunity.
Once gold starts climbing again in late December, silver quickly follows.
So the white metal’s mid-December lull, despite being way over resistance,
marks the birth of its second major seasonal upleg.
This one climbs strongly in January (silver’s fourth-best month on
average) before surging in February (second-best month) to another major
breakout. After this winter breakout silver is again off to the races.
Gold also exhibits strong seasonality in spring, which silver naturally
tends to amplify. The most-successful silver traders rightly view silver as
simply a leverage play on gold, and buy and sell it accordingly. But unlike
gold’s spring seasonal rally that peaks mid-May, silver’s crests
a month earlier in mid-April. Why? Once again a handful of outlying months
skew the average, silver is extremely volatile.
Back in April 2004, silver plummeted over 28% that month after nearly shooting parabolic in the
first mighty upleg of its secular bull. Such a
catastrophic down month naturally drags down silver’s average
performance in April. And then in 2011, silver rocketed 28% higher in April
in a similar nearly-parabolic
climax before collapsing 23% in the first couple weeks of May. When
overbought, silver is super-risky.
So thanks to these skewed spring seasonals,
silver tends to rally another 13.5% on average between mid-December and mid-April.
Again this is a very impressive gain over 4 months, especially as a tendency
that has persisted so many years. While investors who don’t need to
sell won’t care, that mid-April peak is the best time of the year for
speculators to realize profits on silver positions before summer.
While silver holds its own in May until gold peaks, it tends to see a sharp
correction in June (its worst calendar month by far). So the safe bet for
silver speculators is simply to sell at silver’s spring seasonal peak
and then wait until either the late-June or mid-August seasonal-low buying
ops. On average silver corrects 7.5% between mid-April and late June, and the
silver stocks considerably amplify this decline.
Based on silver’s entire secular-bull-to-date performance, my
preferred trading strategy based on seasonals is to
buy in mid-August and sell in mid-April. Silver’s average seasonal gain
over this span is an amazing 23.1%! And the silver stocks naturally tend to
do even better during this strong season. Once those profits are realized,
speculators can simply hold on to the cash to buy cheap again later in the
summer doldrums.
This next chart digs deeper into silver bull seasonals,
looking at them averaged on an individual calendar-month basis throughout
silver’s secular bull. The methodology is the same as above, except
each month is individually indexed and then averaged. With each month
starting at a common base of 100, it is much easier to compare average
intra-month action. This clarifies great buy and sell points.
Silver’s worst months of the calendar year, when it suffers the
deepest losses, coincide with the best times to go long silver and silver
stocks at relatively-low prices. As we saw in the annual seasonals,
these seasonal buying ops happen in late June, mid-August, early October, and
mid-December. On average between 2001 and 2012, a heck of a long time,
traders were well rewarded for buying then.
On the other hand silver’s best months are November, February,
July, and January. Three of these are still ahead of us in this year’s
strong season, which is very exciting. It certainly isn’t too late to
buy silver stocks now if you haven’t already loaded up in the summer
doldrums. But I wouldn’t take too much stock in July. Once again that was
heavily skewed thanks to a single anomalous summer surge in 2011.
Sometimes I’m hesitant to write about seasonals,
because I’ve seen them abused countless times over the years. So
realize they have to be taken with a grain of salt. While these secular-bull
averages do indeed help define probabilities that are very useful for
speculators and investors, they can be easily overridden in any given year. Seasonals are best used as secondary indicators,
not primary ones.
Primary indicators, like Relativity, reveal when
silver prices have advanced too far too fast and are therefore overbought or
have fallen too far too fast and are thus oversold. Overbought prices are
always due to fall imminently, and oversold ones due
to rise soon, regardless of the season. So if silver happens to be
overbought after a strong surge in mid-August, like in 2011, ignore the usual
seasonal buying op.
If silver is oversold after a sharp correction even at a typical seasonal
peak, buy aggressively anyway. Technicals and
sentiment, greed and fear, are silver’s primary indicators. To use an
airplane analogy, think of them as the engines. Meanwhile seasonals
are merely like prevailing winds. While it is obviously better to have a
tailwind than a headwind, engines can still push the plane forward even with
the latter (albeit slower).
Thankfully this year as I detailed in late July, silver is very undervalued relative
to gold. It was deeply oversold and out of favor, and riddled with fear,
heading into this year’s seasonally-strong period. Thus the silver bull
seasonals ought to prove true in anticipating
silver’s performance between now and spring. Nevertheless, it is always
important to keep seasonals in perspective.
Don’t trade them in isolation!
At Zeal we recognized silver’s awesome potential this year deep in
the summer doldrums. So back in mid-June we launched a big 3-month
deep-research project to find the best silver stocks to buy to ride
silver’s coming massive upleg. We started
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and gradually researched each to whittle them down to our dozen fundamental
favorites.
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The bottom line is silver has exhibited strong seasonal tendencies in
this past decade’s secular bull. Silver demand fluctuates dramatically
throughout the calendar year, traders either rushing in or fleeing based on
what is happening in gold. Prudent speculators and investors who employ these
silver bull seasonals in concert with primary
technical and sentiment indicators can trade silver at superior prices.
And we are at a particularly exciting juncture in the silver calendar
year today, heading into its strong season. On average silver tends to surge
dramatically between now and spring, while great silver stocks amplify its
upside. So if you were too scared to buy silver stocks during the summer
doldrums when they were crazy-cheap, you still have a little time to get in
today before they really start surging with silver.
Adam Hamilton, CPA
September 14, 2012
So how can you profit from this
information? We publish an acclaimed monthly newsletter, Zeal Intelligence, that
details exactly what we are doing in terms of actual stock and options
trading based on all the lessons we have learned in our market research.
Please consider joining us each month for tactical trading details and more
in our premium Zeal Intelligence service at … www.zealllc.com/subscribe.htm
Questions for Adam? I would be more than
happy to address them through my private consulting business. Please visit www.zealllc.com/adam.htm for more
information.
Thoughts, comments, or flames? Fire away at
zelotes@zealllc.com. Due to my
staggering and perpetually increasing e-mail load, I regret that I am not
able to respond to comments personally. I will read all messages though and
really appreciate your feedback!
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