Seasonal Sector Trades: Precious Metals Short Opportunities
By: Christopher Mistal & Jeffrey A. Hirsch
February 10, 2015
Over the years silver has peaked 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 32 times in the last 42 years for a win probability of 76.2%. 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 highly successful in 2013 and last year.

[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 appears to have begun early with silver peaking above $18 per ounce in late January.

[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 the top choice to trade this seasonality in the Almanac Investor ETF Portfolio. Average daily trading volume can be light, but when silver declines in earnest, trading activity in ZSL does expand quickly. ZSL can be bought on dips below $98.50. If purchased, employ a stop loss of $86.70. Should silver decline to test its lows from last November/December, ZSL could easily trade at a new high above $130.

Gold’s Shrinking Appeal

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 17 has been a successful trade 24 times in the past 40 years for a success rate of 60.0% with a cumulative profit of $38,420 per futures contract. However, in recent years holding on to the short position established in February longer has been more profitable.

[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 PowerShares 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 40-year average seasonal tendency showing the market 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. On an average daily volume basis, DZZ is the most liquid “short” gold ETF or ETN. 

[Gold (SI) Weekly Bars (Pit Plus Electronic), PowerShares DB Gold Double Short ETN (DZZ) Closes and Gold’s 1-Yr Seasonal Pattern since 1975]

As you can see in this next chart, DZZ has already made a clear move higher in response to gold’s retreat from its mid-January highs. Stochastic, relative strength and MACD indicators applied to DZZ have all turned positive confirming the change in trend. DZZ could be bought on dips below $6.80. If purchased a stop loss of $5.98 is suggested. If gold slips back down to $1150 per ounce, then DZZ would likely trade above $8 per share. 

[PowerShares DB Gold Double Short (DZZ) Daily Bar Chart]

Both of today’s new trade ideas will be tracked in the Almanac Investor ETF Portfolio.

Disclosure Note: At press time, officers of the Hirsch Holdings Inc., or accounts they control did not hold a position in ZSL or DZZ, but may buy or sell at any time.