Seasonal Sector Trades: Gold & Silver Rally Running into Resistance
By: Christopher Mistal & Jeffrey A. Hirsch
February 07, 2019
Historically silver has a seasonal tendency to peak in February, most notably so in 1980 when the Hunt Brothers’ plot to corner the silver market was foiled. Our seasonal analysis shows that going short on or about February 20 and holding until about April 25 has worked 35 times in the last 46 years for a win probability of 76.1%. As you can see in the short silver table, the usual February silver break was trumped by the overarching precious metal bull market of 2002–2011 just four times in ten years.
[February Short Silver (May) Trade History]
After suffering losses for two years in a row in 2010 and 2011, this trade returned to success with its second best performance in 2012 as precious metals in general fell out of favor. This trade was then successful in 2013, 2014 and 2015. A shaky start for stock markets in early 2016 combined with multi-year lows for silver sparked fresh demand for the metal resulting in a loss that year, but this trade returned to success in 2017 and again in 2018. Last year, sizable gains could have been realized with a longer holding period as silver retreated in earnest after mid-June.
[Silver (SI) Weekly Bars (Pit Plus Electronic) and 1-Yr Seasonal Pattern]
In the above chart, silver’s weekly price bars appear in the top half of the chart and silver’s seasonal trend since 1972 appears in the bottom half. Typical seasonal weakness is highlighted in yellow. Historically, silver has declined from late-February/early-March until the end of June. This year, typical seasonal weakness has yet to materialize, but silver does appear to be running into some resistance just above $16 per ounce. Just above $16 per ounce was a key support level silver held for much of the spring last year before breaking down. Silver could continue to rally modestly higher, so we will want to see signs of weakness before executing any trade.
[ProShares UltraShort Silver Daily Bar Chart]
ProShares UltraShort Silver (ZSL) is an inverse (bearish) ETF that seeks to return two times the inverse of the daily performance of silver bullion priced in U.S. dollars for delivery in London and is one choice to trade this seasonality in the Almanac Investor Sector Rotation ETF Portfolio. Average daily trading volume can be light, but when silver does make a move lower, trading activity in ZSL generally does expand quickly. ZSL can be considered on dips below $33.05. If purchased, an initial stop loss of $30.08 is suggested.
Gold’s Sympathy Slide
Seasonally, there is also a weak price period for gold from mid-February until mid to late June. Entering a short position on or about February 20 and holding until March 15 has been a successful trade 27 times in the past 44 years for a success rate of 61.4% with a cumulative profit of $45,140 per futures contract. However, in recent years holding onto the short position established in February longer has been the more profitable trade.
[February Short Gold (April) Trade History]
The chart below is a weekly chart of the price of gold with the exchange-traded note (ETN) known as DB Gold Double Short (DZZ) overlaid to show the inverse price correlation between the two trading vehicles. The line on the bottom section is the 44-year average seasonal tendency showing the market’s directional price trend with seasonal weakness highlighted in yellow. DZZ trades 2x the inverse of the daily price change of a single gold futures contract.
[Gold (GC) Weekly Bars (Pit Plus Electronic), PowerShares DB Gold Double Short (DZZ) Weekly Closes and Gold’s 1-Yr Seasonal Pattern since 1975]
As you can see in this next chart, DZZ has been trending lower as gold moves higher. Gold is also closing in on potential resistance near $1350 per ounce. This is right around the price were gold stalled last year in February and again in April.  DZZ could be considered on dips below $5.35. If purchased a stop loss of $4.87 is suggested.
[PowerShares DB Gold Double Short (DZZ) Daily Bar Chart]
Both of today’s new trade ideas will be tracked in the Almanac Investor Sector Rotation ETF Portfolio.