The sweet spot for seasonal strength in silver has just started. How does the seasonal trade line up this year?
Equityclock.com notes that the strongest time of year for the price of silver has been from Dec. 23 to Feb. 28. Over the past 20 years, the metal has gained an average of 9.05 per cent with positive results recorded in 14 of the past 20 periods. Gains are prominent during the first two months of the year when equity market volatility is heightened, resulting in outperformance versus the S&P 500 averaging 8.65 per cent. The metal posted gains stronger than equity market returns in 16 of the past 20 periods.
Seasonality in silver is influenced by an increase in industrial demand during its period of seasonal strength. Approximately 40 per cent of silver is used industrially – in solar batteries, water purification systems, cellphones, circuit boards, plasma televisions, and radio frequency identification devices (RFIDs). Growth in excess of 10 per cent per year is expected to continue in these sectors. The demand for silver for photography purposes continues, but at a diminished level. Demand for jewelry continues to increase at a slow rate with growing discretionary income. Demand for jewelry has been notably stronger in emerging countries, such as China and India.
In recent years, inflation expectations have proven to be a significant influence on the price of silver. Disinflationary pressures in 2013 led to the weakest performance for the metal since 1981. The metal declined by almost 36 per cent as investors focused on the tapering of the Fed's bond purchase program. At the last FOMC meeting, the committee expressed their commitment to maintain accommodative policies while inflation remains below the long-term target of 2 per cent. Since that meeting, inflation expectations have stabilized with the 5-Year TIPS/Treasury Breakeven Rate sitting around a one month high of 1.71 per cent. The price of silver has stabilized accordingly. A rebound in inflation expectations over the short-term would provide a catalyst for the metal to move higher through January and February.
On the charts, silver exchange-traded funds, trust units, and related silver equity ETFs have an improving technical profile. Silver recently bounced from intermediate support around $19 (U.S.) and moved above its 20-day moving average. A move above $20.48 will complete an intermediate base-building pattern implying upside potential to $22. Short-term momentum indicators including Stochastics, Relative Strength Index (RSI), and Moving Average Convergence/Divergence (MACD) are trending higher. Strength relative to the S&P 500 index is starting to become evident.
A wide variety of investment opportunities are available in the sector. Best known and most actively traded security is the iShares Silver Trust (SLV). Sprott Asset Management offers its Physical Silver Trust (PSLV). Global X offers the Global X Silver Miners ETF (SIL), an ETF that holds a diversified basket of silver mining stocks. Holdings include Pan American Silver, Silver Wheaton, Hecla Mining, Coeur D'Alene Mines, and AuRico Gold. Horizons offers the COMEX Silver ETF (HUZ), a unit based on COMEX futures contracts that trade in Canadian dollars and is hedged against U.S. dollar fluctuations.
Don and Jon Vialoux are the authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. They are also research analysts at Horizons Investment Management, offering research for the Horizons Seasonal Rotation ETF (HAC-T). All of the views expressed herein are their personal views, although they may be reflected in positions or transactions in the various funds managed by Horizons Investment. Horizons Investment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com.