Seasonality, the tendency for prices to consistently move in the same direction at particular times in the calendar year, is always fascinating. While it is intuitive for commodities dominated by orbital-mechanics-driven annual patterns, such as natural-gas demand surging in the cold winters, seasonality also exists in commodities without clear calendar connections.

Over the years I've done a lot of work on gold seasonality. Though this metal is mined year round regardless of the seasons, it still exhibits strong seasonality. This is driven by large fluctuations in investment demand tied to the calendar, including festival seasons in Asia, Christmas season in the West, and financial-year-end cash-surplus buying. The calendar year really matters for gold.

Each time I penned a new essay on gold seasonality, I received many e-mails wondering "what about silver?" I've been curious too, but my technical research showing silver following gold is crystal clear. Gold's action drives psychology in the entire precious-metals realm, so silver traders buy silver when gold is strong and sell silver when gold is weak. Silver's primary driver is gold.

Across all trading days since silver's secular bull was stealthily born in November 2001, it has had a correlation r-square with gold of 89%. Statistically at least, 89% of silver's day-to-day price action throughout its entire bull is directly explainable by gold's own! If you want to trade silver successfully, there is simply no arguing with the fact that you have to watch gold for cues on buy and sell timing.

Since silver so closely follows gold, shouldn't silver seasonality mirror gold's own? I've been wanting to test this assumption for some time, but with all the chaos in the financial markets over the last couple of years it got sent to the backburner. But this week as I pondered gold's seasonally-bullish time of the year we are entering, I started to wonder about silver again.

Conventional futures-based seasonal analysis examines super-long periods of time often running 30+ years. But such long spans encompass bulls and bears alike, and prices behave very differently in bulls and bears. I'm more interested in how silver has behaved seasonally in this secular bull, which can aid our current trading. So this essay's silver bull seasonal analysis begins in 2000.

These seasonality explorations are not trivial undertakings. The spreadsheet underlying the charts in this essay has over 7k formulas, divided among nearly 140 specific sets. For comparability, I used the exact same methodology from my gold-seasonality research. To start, silver prices are indexed within each individual calendar year and again within each individual calendar month.

This indexing is essential so rising silver prices don't skew the results. A $0.25 rally back in 2002 when silver averaged around $4.50 is far more significant than this same increase today. Indexing silver to a common base of 100 ensures that percentage moves are perfectly comparable across time. These annual and monthly silver indexes are then averaged, yielding the pair of charts in this essay.

The average of the annually-indexed silver price is rendered in blue, with the actual data points enlarged since this underlying data is much more important than the connecting lines. The standard deviation is shown in yellow, with the small inset chart establishing its full range. The tighter the standard deviation at any point, the less dispersed the underlying data is and the more predictive value it likely has.

Like gold, silver has exhibited very clear seasonality within its secular bull. If silver's bull-market rise was distributed randomly throughout the calendar years, this chart wouldn't be so volatile. This white metal definitely has stronger and weaker times of the year, which is very useful for silver investors and speculators to know. Even though seasonality is almost never a primary driver, it creates tailwinds and headwinds that can amplify or retard the primary sentiment-driven trends.

Seasonally the silver year starts with its first strong rally. While it actually launches in mid-December, the great majority of this rally runs between January and early April. On average over the last decade, silver has surged 13.5% higher during this span. This winter rally is actually silver's strongest seasonal time of the year. Obviously today we are early on in this bullish span, which is good news for silver traders.

After this winter rally peaks in early April, silver tends to grind lower into early September. While shorter rallies in May and July enliven this drifting span, the prevailing trend clearly remains down. This is the infamous summer doldrums, the worst time of year to own precious metals. The old stock-market adage "Sell in May and Go Away" certainly applies to silver. The universal appetite for speculation tends to wane in the summer, so as one of the world's most speculative commodities silver takes a hit.

But weak prices create an excellent buying opportunity late in summer. Between mid-August and early September, few traders are excited about silver after its multi-month drift lower. This leads to the year's best seasonal entry point in silver and silver stocks, so investors and speculators should capitalize on it. Back in August 2009, when silver was trading under $14, I wrote about the coming big autumn silver rally.

And silver stocks are even better buys than silver in this dreary late-summer timeframe. Just like the silver price tends to amplify gold action, silver stocks tend to amplify silver action. So when traders aren't excited about silver after its usual summer drift lower, the silver stocks are often sold to deeper discounts than the prevailing silver prices warrant. So instead of forgetting about silver late each summer like most traders, capitalize on their apathy by aggressively buying new silver-related investments and speculations.

Then once the busy autumn trading season resumes, it doesn't take long for the zeal for speculation to return and silver to catch a bid. Between early September and early December, silver tends to rally 11.4% higher on average. This second big seasonal rally isn't much smaller than the winter one, so it is well worth riding. After it matures, there is a quick early-December pullback that soon yields to the powerful winter rally.

If you want to integrate the tailwinds and headwinds of silver seasonality into your silver trading, this chart is your road map. Late summer is the best time to add new silver-related investments and speculations. A secondary but inferior buying opportunity exists between the autumn and winter rallies in mid-December. If you want to sell silver-related speculations, your best bet is early April or late May. Today in Zeal Intelligence we have several big 100%+ gains in silver stocks that I expect to realize at much higher prices later this spring.

As mentioned earlier, the reason I hadn't gotten around to crunching silver-specific seasonality sooner was my assumption that it would merely mirror gold's. While this proved correct strategically, tactically there are more differences than I expected. If you pull up the recent gold seasonal chart from my latest essay on it, and compare it to silver's side-by-side, the results are definitely illuminating.

Like gold, silver tends to rally strongly in January and February. But while gold retreats modestly in March, silver simply consolidates high. Spring is always an exciting time of the year for speculators, and optimism grows with the lengthening daylight and warming temperatures. Maybe this helps explain silver's March resiliency relative to gold, and maybe not. But it definitely exists statistically regardless of the reason.

In April and May gold starts rallying again, but in its weakest big seasonal rally of the year. Silver initially leaps up much more quickly than gold in early April, but by the middle of the month the probability of silver selling grows. Realize this seasonal April dip is a bit skewed. You long-time silver traders may remember silver's near-crash event in April 2004, a brutal episode. Driven by a sharp 7.6% correction in gold, silver plummeted 29.3% in just over 3 weeks that month. It was crazy.

Since this seasonal composite is built from the average of annual silver indexings, exceptionally large and atypical swings can influence this entire dataset for many years after the events. Thankfully the averaging mitigates their impact more and more as this bull marches higher, but they are still important to be aware of. The greatest example, of course, was the 2008 stock panic's devastating impact on silver.

So despite this chart, it is probably more useful to consider silver's strong seasonality running into May rather than April. As the next chart which indexes each month individually shows, May is actually the 4th best month of the year for silver on average. And a May end to silver's biggest seasonal rally brings it into line with gold's seasonally-strong time of the year ending around this same time.

While gold tends to drift sideways in the summer doldrums, silver tends to drift lower. This is an interesting commentary on silver psychology. Silver traders only get excited, and buy aggressively, when gold is rallying. And silver prices are more heavily influenced by sentiment than any other commodity I've ever analyzed. So in the summer when gold is merely consolidating, enthusiasm for silver bleeds away faster than gold's. Without strong gold to support it, silver selling sets in and drives its price lower.

Like silver, gold's best seasonal buying opportunity of the year occurs in late August. Late last July around this seasonal low I was predicting the first-ever decisive breakout above $1000 in gold. At the time most gold analysts, caught up in the depressing late-summer psychology, were predicting lower gold prices. I got plenty of flak for such a contrarian outlook, but the seasonals held true. Without a doubt, the best seasonal time of the year to buy gold, silver, and precious-metals stocks is late summer.

Gold tends to rally sharply in mid-September, its fastest seasonal gains of the year as Asian-harvest buying and festival seasons quickly ramp up global gold demand. Silver mirrors this sharp mid-September rally perfectly. And provocatively after that October is a lot like March, with gold retreating considerably yet silver largely holding its own in a consolidation. Apparently the residual excitement from the sharp September rally persists long enough to keep traders from selling silver aggressively in October.

Gold then rallies sharply in November, its 2nd best month of the year after September. Silver dutifully follows it higher, amplifying its gains. And while the silver chart above includes the massive 12.7% silver rally in November 2009, the gold one in my last essay (with data to July 2009) did not. Yet gold's strong November seasonality was already well-established before November 2009's spectacular 12.6% gold gains. Again it makes a lot of sense to pay attention to seasonality even though it is a secondary driver.

Then in December, a disconnect develops. While gold tends to rally strongly throughout the month, silver tends to correct sharply. Although some of this discrepancy is attributable to the fact that my last gold seasonals analysis didn't yet include December 2009's correction, I suspect there is more to it than that. In December 2006, for example, gold merely fell 1.7% while silver plunged 8.9%. If this seasonal anomaly persists, I'll attempt to explore it deeper in a future silver seasonals essay.

There are a couple more interesting observations on silver seasonality versus gold seasonality. First, the 2008 stock panic's impact on silver is far more muted than I expected. Very provocatively, the general stock markets often prove a greater influence over silver sentiment than gold in particularly volatile times. If the S&P 500 (SPX) is falling fast, it scares speculators everywhere including silver traders. So they start ignoring gold and instead grow fixated on the stock markets.

In less than 4 weeks in October 2008, the SPX plummeted 27.1% in the first full-blown stock panic since 1907. While gold got hit too over this panic span, down 15.1%, silver took it exceptionally hard with a 24.5% loss. This is a huge decline over 19 trading days even for a hyper-volatile speculation like silver. Yet if you examine October in this silver seasonals chart, that panic decline isn't even detectable. It has effectively been averaged out by gains in other Octobers.

Second, on average in this bull silver has ended the year at an indexed level of only 114.2, up 14.2% annually. Meanwhile in my August gold-seasonals analysis, gold finished its years at 113.4, up 13.4%. And if the rest of 2009 was added to this earlier dataset, this number would be even higher. Silver traders tolerate silver's extreme volatility because it tends to amplify gold's moves higher. But seasonally, this hasn't been the case so far.

Most silver traders forget that historically silver has not tended to outperform gold dramatically until the very ends of their secular bulls. Between 1976 and mid-1979 before the famous gold/silver superspike, gold was up 200% to silver's 154%. Silver didn't exceed gold's gains until the final 6 months of that storied bull move. As the average annual seasonal gains in today's bull reveal, silver has not dramatically outpaced gold for most of this bull either.

Within this gold bull's best span to date between April 2001 and December 2009, it was up 374%. Over this same span, silver was only up 348%. So realize that gaming silver not only takes nerves of steel to weather its extreme volatility, but it takes the patience of Job as well. Silver's gains will probably easily eclipse gold's before today's bulls end, but they may very well only pace gold until near the end. For some investors, silver's considerably greater risk than gold just isn't worth the angst silver's wild volatility creates.

This final chart looks at silver's seasonality on a calendar-month basis. Silver is individually indexed to 100 in each month, and then each calendar month's indexes across every year are all averaged together. This perspective adds additional insights into silver's intra-month seasonals that aren't readily evident in the first chart. Once again the small inset chart shows the full range of the standard-deviation bands.

Silver's best months seasonally are November, January, February, and May. These are similar to gold's of September, November, December, and May. On average in these hot months for silver during its autumn and winter seasonal rallies, 4% to 5% gains can be expected. If you want to trade silver-related positions within calendar months instead of waiting for the seasonally-optimal times within a year, this chart is useful.

For any given month, the best time to add new long positions is at silver seasonals' lowest levels. And of course the opposite is also true, the best time to sell positions and realize profits is when the seasonals are the highest. In January for example, the seasonal averages favor adding longs early in the month if you want to deploy new capital. But if you want to take profits that month, later on is a higher-probability time to catch seasonally-stronger silver prices.

While silver bull seasonals are interesting, and useful, a huge caveat applies as in all seasonal analysis. Seasonals are merely secondary drivers of prices, tailwinds or headwinds. Far more important for silver's near-term fortunes at any time are its prevailing technical and sentiment situation. If silver is seriously overbought, and greed reigns supreme, it is likely due for an imminent correction no matter how bullish its seasonals happen to be. And if it is deeply oversold and drenched in fear, it will probably rally sharply no matter how bearish its seasonals are.

So don't overestimate the importance of seasonals in your own trading. Look to technicals and sentiment first, and only then consider whether seasonals are likely to amplify or retard the prevailing short-term trend. Profitable trading requires investors and speculators to carefully consider and process a broad array of often-conflicting information before determining the highest-probability-for-success course of action. Within this weighing, seasonal influences cannot override significant technical and sentiment levels.

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The bottom line is silver definitely has strong seasonal tendencies. While they mirror gold's strategically as expected, since gold action drives silver-trader sentiment, they also differ from gold's tactically at times. Silver's best odds for rallying are in autumn and winter, when its strongest seasonal rallies unfold. Its weakest behavior occurs in the summer doldrums, the end of which are the best time to buy silver and silver stocks.

But it is always crucial to remember that seasonality is a secondary driver at best. The tailwinds and headwinds seasonal tendencies create can be easily overcome by sufficiently-overextended technicals and sentiment. Silver seasonality is always worth considering when making silver-related trading decisions, but it must be relegated to the smaller peripheral role it deserves.

Adam Hamilton, CPA

January 22, 2010