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Silver Down 91% in Presidential Election Years Since 1917


Expect yet another down year for silver.

If one would have bought silver at January 1 and sold it on December 31 during every presidential election year from 1917 to 2011, one would have lost 91%. Let's examine silver and see if we can find a predictor of when silver is poised to beat the odds and have a strong election year.

The first column in the following table lists presidential election years. The second column will be explained later. The third column is silver's performance during presidential election years. When first viewing the table, it probably best to ignore the second column and focus on the third column.

Silver was up in only five of the last 23 presidential election years. Silver went up more than 5% in only two out of the last 23 election years. Knowing the silver bugs, they will point to 1972 and 2004 as proof that silver can go up double digits in an election year.

This is where the second column comes into play. There are many ways to value silver (see archives). Since the theme of this article is silver and election years, we will just pick one indicator and use it as a reference rather than rehashing all the indicators analyzed in past columns which calculate silver's fair value to be in the pre-teens. The second column designates how much silver was trading above its 1920-2011 trendline on the first day of the election year. For example, silver finished last year at $27.81 and its trendline was at $12.77. That means that silver was trading 2.18 times above its trendline (+27.81/12.77=2.18).

OK, but what does this have to do with election years? In silver's two presidential election years since 1917 when it went up over 5% (1972 and 2004), it was trading far below its trendline. In fact, over the last 13 presidential election years, the two years silver was most undervalued at the beginning of the year were 1972 and 2004. Check out the charts to more easily visualize this.

Silver's inflation-adjusted prices at the start of 1972 ($1.40 nominal) and 2004 ($6.84 nominal) equate to $7.71 and $8.13 in today's dollars.

There were only four election years when silver started the year at twice its trendline -- 1920, 1980, 1984 and 2012. Silver's performance in the first three of those instances was -51%, -44%, and -30%. Only time will tell how 2012 fares.

Low earnings yield at the end of 1999 warned investors to expect subpar stock market returns over the coming decade. Similarly, various valuation techniques explored in past articles are suggesting the next 7-12 years will not be kind to silver speculators. When you combine an overvalued silver market with a poor phase in the election cycle, you are stepping up to the plate with a 0-2 count. Baseball players hit about .160 when facing a 0-2 count.

Even if you completely dismiss the silver trendline indicator, silver has declined by at least 6% in seven out of the last eight election years. The annualized return of silver during election years since 1917 is -10%.

This bears a resemblance to another indicator. Last year the AAA Long Term Corporate Yield declined by 22%. This was the biggest decline in the history of the data which goes back to 1919. The top four declining yield years for long term AAA corporate bonds were 2011, 1995, 1982 and 1985. How did silver do the following year?

2012 ???
1996 -8%
1983 -17%
1986 -7%

On an annualized basis that equates to -10.7%.

As of January 22, 2012, silver was up 15.53% year-to-date. Over the last 23 presidential election years, by the end of the year silver was up more than that once. That year was 1972. On January 1, 1972, silver was:
  1. less than five months removed from the end of the gold standard;
  2. less than 2.3 months removed from the end of a 3.4 year bear market;
  3. at an inflation adjusted price of $7.71;
  4. the most undervalued (42% below fair value) by the silver trendline indicator in over 70 years;
  5. extremely undervalued by a wide variety of other metrics.
In other words, 2012 is not 1972.

Based on the presidential election year cycle, the probability for silver finishing the year higher than it is now (over $32) is low. Throw in the fact that silver is overvalued, the probability diminishes even further. The three presidential election years since 1917 when silver was most overvalued were the three worst performing presidential election years for silver. The current situation is the fourth most overvalued. The indicators listed in this article suggest silver's recent weakness will likely persist in 2012.

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