Study: what happens next when precious metals consolidate for a long time


I’ve been looking at silver for quite a while, and its chart looks bearish to me. Silver has been swinging sideways in a very narrow range for a long time (4 months).
*Gold and silver move in the same direction most of the time. If you can predict silver, you can also predict gold.

This is a bearish pattern because based on what I’ve seen, silver’s medium term tops tend to be flat.
But you know that I’m not a chartist – I prefer facts and data vs dogma and charts. So here’s the data to prove my thesis.
I use standard deviations as a percent of silver’s price to determine how volatile silver has been.
Silver’s standard deviation over the past 4 months is now merely 1.7% of its price. This is an extremely low standard deviation.
Here’s what happens next to silver when its 4 month standard deviation is 1.7% (excluding overlapping cases over the past 4 months).
Here are silver’s historical returns.

Click here to download the data in Excel.

Conclusion

This is a medium term bearish sign for silver. Look at silver’s historical forward returns for the next few months. Almost all bearish.
But this raises a more important long term question. I previously thought that gold and silver are in new bull markets. I’m seriously starting to doubt this case. Perhaps silver is still stuck in a long sideways bear market.
Long periods of low volatility are hallmarks for silver’s historical bear markets. In other words, silver’s volatility shouldn’t be this low if it is in a bull market.
All of the above historical signals occurred when silver was in a bear market. None of them occurred when silver was in a bull market.


Click here for more market studies.

3 comments add yours

  1. thank you Troy . This study is brilliant .I also thought a long consolidate period would result in a strong break out bull market .

  2. Hi Troy,
    I feel lack of volatility is not a very strong indicator. How about fundamentals? I am no expert, but it seems there is a correlation between the trade war concern and USD and precious metal. Trade war concern increase, USD become strong and precious metal become relatively weak. And it is very hard to predict Trump. We predict he doesn’t want trade war, but his attitude became strong recently. Maybe it is true he wants to act strong (by bully the allies) before meeting with North Korea, or maybe not. He is so hard to predict. Another reason can be that unlike a couple months ago, the concern of inflation has eased. As you pointed out, inflation is rising gently but doesn’t surge. Furthermore, rising interest rate is not good for precious metal. But doesn’t rise doesn’t mean it will fall. I also don’t see any strong reason to drive the price down. Is there any?

    • I think gold and silver move more inline with technicals than fundamentals. Gold and silver are mostly tools for speculation, which is why fundamental supply and demand aren’t that important.

Leave a Comment