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We want to introduce investors to a new metric that can help them understand the precious metals markets. This is very important for active investors (especially precious metals investors), because it can give a more complete picture of the markets and can help investors anticipate future price moves.

For this article we're going to introduce investors to a simple way to measure sentiment in the paper metals markets across the globe. For now we will keep it simple and strictly analyze silver from the perspective of a US investor - but the lessons learned here can be applied by investors around the world.

Measuring World Silver Sentiment via the SLV ETF

One interesting way to look at the silver market is to break it down into U.S. trading and foreign trading (which we will refer to as "Overnight Trading" for the purpose of this article). The goal is to understand how silver performs during U.S. hours versus overnight hours, and see if there are any lessons or trading strategies that we can take from this. We will use SLV as a proxy for the silver price because its data is very easy to retrieve/analyze, it trades during U.S. market hours, and it is a fairly accurate proxy for the silver price.

To do this we will use data related to SLV's open and close prices, and then compare investor performances in three situations:

  1. Holding silver throughout the period - this is the passive buy and hold strategy.

  2. Selling silver at the U.S. open and buying it back at the U.S. close - this strategy exposes investors only to overnight gains/losses and avoids all U.S. trading gains/losses.

  3. Selling silver at the U.S. close and buying it back at the U.S. open - this strategy exposes investors to only U.S. gains/losses and avoids all overnight gains/losses.

Let us illustrate this through an example that analyzes the following three day period:

(click to enlarge)

As an investor if you employed the three strategies mentioned above with $1000, you would have the following results:

(click to enlarge)

So for this brief period, silver rose by 1.82%, which means investors employing a buy and hold strategy would have made a nice three day gain. Investors who chose to expose themselves only to the overnight market by selling SLV at the beginning of the day (at open) and buying it back at close would have made 2.02% - a 10% higher return. Finally, the poor investors who chose to sell at the U.S. close and buy back SLV at the U.S. open, would have lost .19% over the same three day period.

Over time we would expect the alternative strategies to average out to half the performance of the buy and hold strategy. So if SLV rises by 20% in a year, we would expect each alternative strategy to gain around 10%, since you are only holding silver half the time as the buy-and-hold strategy, and we assume markets would tend towards equilibrium in the long-term.

Analyzing the Data

Let us now analyze the data and see how silver has performed on a year-to-date basis with each of these investment strategies.

(click to enlarge)

SLV started the year at $29.37 (the 12/31/12 close) and ended the year-to-date period at $21.62 (5/21/13).

We would expect to see the losses of each of the investment strategies to be around half of the buy-and-hold losses since investors would only be exposed to half the time frame. But we see that the great majority of losses for the year have been in the overnight trading period, with the U.S. sessions being very strong. In fact an investor who simply sold at the U.S. close and bought at the U.S. open would only be down 5.33% for the year in silver - which would make many precious metals investors very happy.

Let us now take a look at each strategy on a historic basis and see how each would have performed.

Green/red highlighting represents the best/worst performing strategy

As the table above shows, there really is no strategy that works all the time - which should be a surprise to nobody. But employing the wrong strategy can seriously handicap investors. For example, in 2010 when silver went up by 82%, if you employed the wrong strategy you could only be up by 11%- your gains would be 70% lower than if you had just held SLV for the year.

What Does this Information Tell Us?

Unfortunately, the author probably does not know any better than the readers. But in my opinion it could be one of the following factors:

  • Weak Foreign Economies

  • Manipulation During Lightly Traded Hours

The first reason relates to the strength of the economies - silver will perform better in economies with stronger growth. The reasoning is that if large investors, funds, and banks are facing economic contraction then they will be selling paper silver (the physical market is a bit different). We know both China and Europe are at the very least showing sluggish growth, and Europe is probably contracting. This would probably cause the price to drop during their trading hours and may explain the recent overnight weakness.

The second reason relates to overnight hours being less liquid than U.S. market hours - which would make it an ideal time to influence the price. This would allow a manipulator to push the price down with less cash, with the goal being to influence the psychology of the other investors to sell. This could be done by constantly providing lower open prices to discourage investors, with the purpose being to either buy back silver after other investors panic or to prevent people from buying precious metals in fragile markets (such as Europe).

Readers who have any other insights into why silver is showing such extraordinary weakness during Asian trading, please feel free to share them in the comments section.

Conclusions for Investors

The biggest conclusion for investors is that there is a significant weakness shown during Asian trading hours, which contrasts against surprising strength in U.S. trading hours - which is a bit unexpected. The reasons why are debatable, but this is our current silver environment.

For investors in SLV, SIVR, PSLV, CEF who want to use this information to trade, it may be time to take a contrarian approach and play the turnaround and buy during the U.S. close and sell during the U.S. open. We do not recommend this strategy for most precious metals investors because it can really burn them. We have shown how an 80% up year for silver can be reduced to a mere 11% gain if the wrong strategy is used.

This is more for the traders who are able to monitor their investments frequently, maintain discipline in their trades, have experience trading, and have low trading expenses. Even then we do not recommend precious metals investors dedicate more than 20% of their precious metals portfolio to any of these alternative strategies. In addition, with algorithms out there that are the best that money can buy, investors are better served buying gold and silver for fundamental reasons rather than trying to beat the algorithms at their own trading games.

Disclosure: I am long PSLV, S. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.