Seasonal Sector Trades: Gold & Silver Heading Lower
By: Christopher Mistal
May 16, 2019
Silver has a strong tendency to peak or continue lower in May, bottoming in mid to late June. Traders can look to sell silver in mid-May and maintain a short position until on or about June 23. In the past 46 years this trade has seen silver (July contract) decline 30 times for a success rate of 65.2%. Prior to 2014, this trade had been successful for eight years in a row. Since 2014 this trade has failed to materialize three times. However, it has been successful in 10 of the last 13 years. 
In the second chart below, the 47-year historical average seasonal price tendency of silver as well as the decline typically seen from mid-May until the low is posted in late June or early July is shown. This May silver short trade captures the tail end of silver’s weak seasonal period (shaded yellow) that typically begins in late February or early March.
[May Short Silver Futures Contract – Trade History]
[Silver Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]
Aside from establishing a short potion in the futures market or through a leveraged, inverse ETF or ETN, an outright short position in iShares Silver Trust (SLV) is preferred. Compared to a leveraged, inverse ETF or ETN, daily volatility could be lower reducing the possibility of being prematurely stopped out of a position. Furthermore, daily tracking and compounding effects should also be less. SLV currently holds nearly 10,000 tonnes of physical silver in the trust. This corresponds to nearly $4.7 billion in assets. SLV daily trading volume over the last 20 days is in excess of 6.5 million shares on average offering plenty of daily liquidity.
[iShares Silver Trust (SLV) Daily Bar Chart]
In the above chart, SLV has been trending lower since February. Prior to February SLV enjoyed a brisk rally from November lows just above $13 to briefly over $15 in February. The current decline appears to be on track for a retest of November’s lows and possibly lower. The current decline has been choppy. There have have periods of declines followed by modest rallies that quickly fade. Look to establish a short position in SLV during any bounce above $13.90. If shorted, an initial stop loss at 14.10 is suggested. This trade will be tracked in the Almanac Investor Sector Rotation ETF Portfolio.
Gold’s Fading Shine
Gold also tends to post seasonal bottoms in late June or early July, as demand increases when jewelers again stock up ahead of a the seasonal wedding event in India. Gold prices are also subject to spikes in demand from the investment community, as a hedge or protection from concerns over inflation or during times of economic instability or uncertainty. It is valued in terms of the U.S. dollar, so periods of dollar weakness can support gold’s value. Uncertainty over trade and tariffs does exist and has existed for some time now. During this time inflation has remained subdued while gold has been trending lower. The trend of lower gold is likely to continue.
[Gold Continuous Contract Daily Bar Chart & 1-Yr Seasonal Pattern]
Shorting an August gold futures contract on or about May 19 and holding until the end of June has been fruitful in 29 of the last 44 years for a success rate of 65.9%. This trade’s best year was 2013 when stocks put up their best yearly performance in more than a decade. This trade has worked in 10 of the last 13 years.
[May Short Gold Futures Contract – Trade History]
The success of this trade and/or silver’s trade will likely depend on the Fed, what it does or does not do with interest rates and whether or not the Trump Administration can reach a final trade agreement with China. Traditional jewelry and industrial demand is likely to follow historical patterns but investment demand is the wildcard. Gold is an appealing store of wealth when the U.S. dollar is weakening and gold is clearly competitive with cash, especially in countries with negative interest rates. Those negative rates are no different than having to pay a storage fee for physical gold or an expense ratio for holding an ETF consisting of gold.
Instead of using a leveraged, inverse gold ETFs or ETNs a basic short position in SPDR Gold (GLD) will be the path taken to execute a trade. GLD could be shorted now up to a limit of $122.00. Stochastic, MACD, and relative strength indicators are all rolling over as the recent gold bounce is fading. An initial stop loss of $123.95 is suggested. For tracking purposes, a GLD short position will be established in the Almanac Investor Sector Rotation ETF Portfolio using GLD’s average trading price on May 17, 2019. Additional purchases in DB Gold Double Short (DZZ) can also be considered at this time.
[SPDR Gold (GLD) Daily Bar Chart]