“History doesn’t repeat itself but it rhymes” the saying goes. If this is
in fact true, and what has happened before might imperfectly repeat itself in
the future, this might be used in financial markets. But how to use it
exactly? Is there a way to get clear indications as to what used to happen in
the past to get a notion of what might come?
It is frequently difficult to quantify past events in a meaningful way to
get an idea of the possible future tendencies. At Sunshine Profits, we have
come up with a methodology to look at the past and recognize tendencies that
might repeat themselves in the future – we have developed a tool called True
Seasonals to analyze this sort of patterns.
Our approach is to look at historical periods: years, quarters and months.
We look at those periods and establish how gold, silver and other assets used
to behave in these periods. Based on that, we infer what their behavior might
be in throughout the year, a given quarter or a given month. The details
behind the process are slightly more complicated but the general idea is
simple – to look at the past to try to get a sense of what might happen with
a given asset.
Now this is what we would call seasonality – how gold and
other assets behave in different parts of the year. “Sell in May and go away”
is yet another saying. It suggests that one should sell gold and silver in
May and wait until the fall to reenter the market. Our analysis of seasonal
tendencies is actually able to pinpoint whether selling in May actually was,
on average, a good idea.
Apart from simple seasonal tendencies, there is also on other kind of
influence that keeps recurring throughout time. It is the expiration of
derivatives. The market is full of rumors how the prices of gold and silver
might be kept artificially low around the dates when gold and silver futures and options expire. Whether there is
any substance in these claims remains largely questionable. But True
Seasonals doesn’t stop at analyzing simple seasonality. It also takes into
account the influence derivatives might have on precious metals and other
assets. In a way, this is like having two tools in one package.
If you haven’t had the chance to do so yet, dive into our report on gold seasonality,
which explains True Seasonals in greater detail. In the report, we read:
True Seasonals has two basic functions. The first identifies the seasonal
influence on stock prices and assesses the risk connected with stocks. This
function is able to indicate whether the prices of a stock are usually
higher/lower during a particular part of year and whether the risk involved
tends to be relatively high or relatively low. Various Internet blogs thrash
out this very subject, but this function enables you to confront the buzz
with real data.
The second function is similar to the first, but instead of identifying
the price level and the risk throughout the whole year, it identifies these
qualities on the dates of the expiration of derivatives, i.e. gold futures
and options, as well as stock options. We designed this function to provide
substantial evidence whether or not the expiration of derivatives influences
the prices of precious metals. This matter has been the topic of a
long-lasting public debate among precious metals investors. This tool puts
the debate to rest.
We combined these two functions to produce True Seasonals, one of the most
comprehensive tools based on seasonal influence and the first one to include
the impact of futures and options, making it the best instrument to analyze
recurring price changes.
So, the general idea is to look at a specific period during a year, say
June and True Seasonals will give you the idea on how gold, silver or other
assets used to perform, on average, in this period in the past – in this
specific example this would be how gold used perform in July in the past.
Seeing this performance could help you form an opinion on how gold might
perform in July in the future.
This will all become a lot clearer once we look at a real example. Let’s
consider what True Seasonals would have shown you on May 31, 2015. We’re interested
in gold and in a monthly horizon. Additionally, we want to consider the
impact of the expiration of futures contracts.
We focus on the red line. It is the projected price path for gold for
June. As we see, True Seasonals would have suggested on May 31, 2015 that
gold would generally depreciate in June. They would have also indicated that
there was to be a short-lived rebound in the second part of the month.
Now, let’s take a look at a chart showing the actual price for June 2015
(chart courtesy by http://stockcharts.com).
If we take a look at the period from the beginning of June (marked as Jun
on the chart) to its end (Jul), we see that gold generally declined in June
with a sharp and visible bounce in the second half of the month. This bears
analogy to what would have been suggested by True Seasonals. The analogy is
not perfect but just as we have written earlier “history doesn’t repeat
itself, it rhymes.” Meaning that the analogies between past and present
events might not be perfect, but they might be useful nonetheless.
Now, let’s take a look at what True Seasonals suggest for July.
The tool suggests appreciation in the first part of the month but
depreciation later on. As it turns out (take a look at the previous chart),
there was a move up in the first part of July and it was quickly followed by
sharp depreciation. Again, this is not in perfect accordance with the price
path suggested by the tool, but it bears resemblance, at least to some
extent.
One thing to bear in mind is the importance of the Quality of Projection
measure. Our report (pdf) on gold seasonality
explains:
How reliable are True Seasonals? What is the “quality” of the predicted
prices? Is it the same no matter what or highly precise at some times and
less so at others? Such information could help you decide when it is
imperative to use our tool and when it is only optional.
Our research team has come up with an answer. Exclusively for this tool
and available only at Sunshine Profits, we have designed and implemented a
unique measure – Quality of Projection (QoP). You can immediately assess the
quality of a predicted price of a particular asset and decide if you want to
use True Seasonals in your investment decisions. Moreover, QoP allows you to
compare the usefulness of predictions of different stocks and choose the
prediction that suits your needs. QoP is based on a 10-point scale where 10
means that on a particular day the prices of a stock used to be very stable
and therefore the risk connected with the prediction is relatively low – the
quality of the prediction is extremely high and therefore needs to be
included in your analysis. To the contrary, 0 and negative values mean that
the prices of a stock has been volatile and the quality of prediction is
extremely low, investment more risky and the use of True Seasonals only
optional.
Now, take a look at the chart again. The QoP is relatively high throughout
the projection period but it also has a local bottom in the first half of the
month, roughly coinciding with the discrepancies between the tool and the
actual price path. This stresses the importance of using the QoP measure.
Also, note that True Seasonals are to be used in conjunction with other
tools. For instance, if there are strong technical signals in the market,
they might take precedence over the indications of the tool.
If we were to look at the second part of July, True Seasonals suggest
depreciation. However, there are also factors other than seasonality at work
in the precious metals market. We cover these factors at length in our Gold & Silver Trading Alerts. To
get the whole picture, you could combine the analysis from Gold & Silver
Trading Alerts with the analysis from True Seasonals.
Please, be aware that no representation is being made that the patterns
shown by True Seasonals will actually materialize in the future. Mind that
the relationships in the precious metals market are not stable and might
change over time.
If you enjoyed the above discussion of gold seasonality and our analysis,
we encourage you to stay up-to-date with our free articles and alerts - sign up for our gold mailing list today.
It’s free and if you don’t like it, you can easily unsubscribe.
Thank you.
Regards,
Mike McAra
Sunshine Profits‘ Contributing Author
Gold Investment & Silver
Investment at SunshineProfits.com
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