Silver Bull Seasonals 2

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 [6] 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 [7] 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 [8]. 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 [9] 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 [6] 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 [10] 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 [11] 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 [12], 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 [13] 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!

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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

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