Volatility Analysis: Silver & Copper Futures Market
by Joshua Enomoto, Founder of and Contributor

Since the extreme commodities sell-off on April 15, 2013, many precious metal and hard asset investors have undoubtedly thrown up the white flag of surrender, with several others contemplating a similar act.While stories of bullish fundamentals are encouraging, even the most hardened veterans of the metals will concede that stories only go so far: it’s the impact to the pocketbook that really counts. To make matters even worse, other asset classes, especially equities, seem to be riding the bull of strong central bank commitments to low interest rates and easy, breezy liquidity, yet the precious metals languish in a consolidation range. Surely, we would have seen a short squeeze by now!? In prior articles, we have discussed unusual patterns developing in the derivatives market as being important clues to the directional movement of the underlying sector. Today, we will bring something new to the table: volatility analysis.

In the most recent session at the COMEX (May 3, 2013), the spot-price of copper jumped up 6.5% against the prior close on speculation of improving labor market conditions and therefore, optimism that the overall economy is aligned on a growth track. Silver, on the other hand, only rose 1.3% on less than convincing volume. Because silver has both a monetary and an industrial component to its demand structure, could the white metal follow copper on a demand trend based purely on economic reasons as opposed to defensive ones? From a volatility perspective (measured as monthly percentage of change in the commodities futures market), both metals actually share very common market behaviors:


Contrary to popular opinion that silver is the “devil’s metal” due to its notorious price swings, copper is actually the more volatile element when comparing peak to trough. This was due to the 2008 financial collapse, when industrial metals extracted the heaviest toll as the global financial system teetered on the brink of disaster. Discounting that event, the volatility trend between the two metals are very much complimentary.

Let’s consider each element’s volatility trend, beginning with silver:


Over the past thirty years, the narrowing of silver’s volatility band portended an overall price decline, but followed by a strong movement up. We can see that prior to the precious metals bull market (roughly 2001), the volatility band was narrowing down to a range of less than 1%. Since 2006 until now, the volatility band has again been declining, and although we did see a record move in April of 2011, the market has been on a decided downturn. While it is possible to see further downside in the spot-price, silver investors can take some measure of comfort that the lower range of the volatility band has been increasing, suggesting that upside support could be on the horizon.

Next, let’s consider copper volatility:


Just like with silver, the narrowing of the volatility band is usually a positive sign of an impending bump-up in the spot-price, as was witnessed in 1983 – 1986 and 1999 – 2002. Since the huge spike in copper in the spring of 2006, the volatility band has contracted, which is indicative of another move up.

Things get more interesting when we average-out the volatility over a twelve month period. For silver, despite its wide range, the volatility trend has been inclining since 1983:


Also, there can be no doubt that silver remains in a bull market, as the spot-price (dotted line in above chart) has surged dramatically since 2002. Between 1983 and 2000, yearly average volatility was negative -0.32%. From 2001 to 2012, that figure jumped to +1.62%. Unless this percentage were to come down in dramatic fashion, the numbers are quantifiably in favor of silver remaining in a bull market.

Finally, let us take a look at copper:


Copper, despite having a wider “spread” than silver, is likewise on a growth trend. Between 1984 and 2000, the average yearly volatility measured 0.30%. From 2001 until 2012, this figure improved to 1.3%, confirming that the base metal is indeed in a bull market.

While the specific ins-and-outs of the commodities market is impossible to predict, analytical tools give us alerts or warning signals in order to better anticipate future price actions. In the case of silver and the general metals complex, it is far too early to call a bear market as volatility trends are both tightening its spread as well as inclining in a positive direction. A true bear market would feature extreme spreads as gravity cuts deeper on the downside, as well as aggressive deceleration in the price action, neither of which are present in the current commodities market.