In a typical summer, the precious metals markets take a breather and price isn’t as
volatile as during the rest of the year. Unless there is a major Geo-Political event, this
summer will probably be similar to the rest, that is, the weather will be hot and the price
of the precious metal silver probably will trade in a fairly narrow range. To better
understand how wide this trading range is, I investigated the price of silver during the
months of May, June, July, and August from 1990 to 2011. History can’t predict the
future, but it can give a peek into some possibilities. This article is a quantitative analysis
of silver prices for the last 22 years with a possible trading range identified.
The methodology of the analysis was straight forward. The Spot silver prices used in the
analysis came from the Kitco web site. For each year, 1990 to 2011,
seven different prices were gathered, they were: 1. average price in April; 2. highest
closing price in April; 3. lowest closing price in April; 4. closing price on the first trading
day in May; 5. lowest closing price in May through August; 6. highest closing price in
May through August; and 7. closing price on the first trading day of September. The first
parameter calculated from this data was a “Volatility Index”. This index was derived by
taking the difference between the April high and April low divided by the average price
in April. A year of low volatility was 2000. In April of that year, the highest closing price
was $5.13 and the low was $4.93, combining these numbers with the average price of
$5.05 gives a volatility index of 0.04. April of 2011 was a different story with very
volatile price changes. During April of 2011, the high was $48.70, low $37.63, and the
average $41.96 resulting in a volatility index of 0.26. The importance of calculating the
April volatility index is that it correlates with the price change over the period May 1 to
September 1. In other words, if April price movements are small then the summer month
price movements tend to be small. For April 2012, the high was $32.97, the low was
$30.70, and the average was $31.55. This gives a volatility index of 0.07 for April 2012.
This is in the low end of the range volatility range.
The next step in the analysis is to plot the percent change, both high and low, in the price
to the May-August period to the closing price on May 1 as a function of volatility index.
Figure 1 – Percent Increase from May 1 to the Highest Price in May through August.
Figure 1 shows the wide variation in the highest price during the summer months to the
starting point of the first trading day in May. Each data point represents a particular year.
The year with the largest change in price upward was 1993. For that year, the Volatility
Index was 0.14 and the percent increase in the price of silver was 27 percent. For 2012,
the Volatility Index was 0.07. Reading from the graph in Figure 1, this equates to a
percent increase of nine percent. Using the nine percent change and one eight percent
standard deviation (calculated from the raw price change data) you would expect the high
for the summer months to be $30.78 + $30.78*1.17 = $36.01.
Figure 2 – Percent Decrease from May 1 to Lowest Price in May through August
Figure 2 plots the percent decrease for each year from the first trading day in May to the
low point of the summer months. Similar to Figure 1, each point represents a particular
year between 1990 and 2011. The year with the largest price decrease in Figure 2 was
2011. During that year, the price of silver dropped from a high of $43.61 per ounce on
May 3rd to a low of $32.50 on May 12th. During the next four months the price bounced
between these two extremes. Reading from the graph in Figure 2, this equates to a
percent decrease of nine percent. Using the nine percent change and one nine percent
standard deviation (calculated from the raw price change data) you would expect the low
for the summer months to be $30.78*(0.91-0.09) = $25.24.
Conclusion: Based on the analysis above I expect the price of spot silver to vary from a
low of $25.24 to a high of $36.01 during the period of May 1 to September 1, 2012. Like
all types of analysis that make predictions about future prices (or anything else as that
goes) they should be taken with a bit of caution. Seldom does history repeat itself exactly
based on past statistical parameters.
This educational guide was prepared by Doug West of C&D Coins in Derby, KS.
Disclaimer: this article is intended solely for information purposes. The opinions are
those of the author only. Please conduct additional research and consult your financial
adviser before making any investment or trading decisions. No responsibility can be
accepted for losses that my result of trading on the basis of this analysis. If you found this guide helpful, hit the "yes" button next to the "Was This Guide Helpful".