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In a previous article I showed that a modified Coppock indicator could identify good investment periods for gold. This indicator, with some changes to its parameters, can also be used for silver. The long-time average annual return from silver based on the signals from this indicator exceeded those from gold by a considerable margin, 19.7% for silver versus 14.9% for gold. At the end of April 2011 the model signaled to sell silver and since then it has not produced a buy signal. Note that the indicator has formed a trough now which usually precedes a buy signal.
Figures 1 and 2 show the silver price from 1972 to 2013, the modified Coppock indicator (blue graph), the buy signals (vertical black lines), and the model's investment periods in silver (gray shaded periods).
Sell signals cannot be determined with this indicator, but a good strategy was to sell when the price of silver had appreciated by 67%, but not later than 88 weeks after a buy signal date. However, if a new buy signal appeared before the sell date applicable to the previous buy signal, then the sell criteria was applied from the new buy signal's date onwards, and so on. This had the effect of prolonging the holding periods if they contained numerous buy signals. The holding periods and returns for each period are shown below, with only two of the thirteen periods showing a relatively small loss.
An investment in silver according to this model's signals produced a 19.71% compounded annual return from April 10, 1972 (the initial buy signal date) to April 22, 2011 (the last sell signal date) without interest on cash when the model was not in silver. With interest at the Federal Funds rate from a money market account when the model was not in silver the compounded annual return was 22.87%, equivalent to $100 growing to over $300,000 over this period. The model's returns are considerably better than a continuous investment in silver which would have produced only an 8.96% average annual return over this period.
The silver price was obtained for every Friday and Monday over the model's time span, from 1970 to 2013. The indicator was calculated with the Friday values. It's the sum of the 60-week rate of change and 40-week rate of change of the silver price, smoothed by a 43-week weighted moving average (WMA), multiplied by 10.
Indicator = 10 x WMA of (ROC + ROC)
The criteria for buy signals are:
- The level of the indicator must be less than 12.0,
- and the level of the indicator minus the level of a 18-period exponential moving average of the indicator must be greater than 0.12,
- and the maximum level of the indicator over the preceding 24 weeks minus the current level of the indicator must be greater than or equal to 0.014.
Once a buy signal is generated (on a Friday) the investment is made the following Monday.
A sell signal is generated when:
- the silver price has appreciated for the first time by at least 67% from the buy price, as determined from the Monday silver prices, but not later than 88 weeks after the buy date.
However, should a new buy signal appear before the sell signal applicable to the preceding buy signal has occurred, then the sell criteria apply renewed from the new buy signal onwards, and so on.
Georg Vrba is a professional engineer who has been a consulting engineer for many years. In his opinion, mathematical models provide better guidance to market direction than financial "experts." He has developed financial models for the stock market, the bond market and the yield curve, all published in Advisor Perspectives. The models are updated weekly. If you are interested to receive theses updates at no cost, send email request to firstname.lastname@example.org.