30% Corrections In Silver Are Normal

| About: iShares Silver (SLV)

The title may sound hard to believe, but the historical data shows that large downside corrections in silver have been normal during silver's 12-year bull market.

Since late November 2012, silver has plummeted about 35%, but since the bull market that began in 2001, silver has had several large corrections to the downside. It has corrected more than 30% five times and corrected between 20% to 30% six times. So on average, silver has dropped 20% or more about once every year since 2001. After these major corrections, however, silver has staged significant rallies before hitting another downside correction. On average, these rallies have yielded a 54.7% gain, including a spectacular 228% gain from February 2010 to April 2011. Applying the 54.7% average gain to the current price would put silver over $34. No rally after a significant downside correction has been less than 18%. Applying the 18% minimum gain to the current price would put silver at roughly $26.

Long-term investors in silver, therefore, should not be shaken out of their positions because this current correction is normal and the resulting rallies in silver have yielded large gains and sometimes spectacular gains. Long-term positions should be fully paid-for so that you cannot get shaken out due to a margin call. That was the lesson I learned in June 2006 when I had too many long silver positions in the futures market. I woke up one morning and noticed that part of my long position had been involuntarily liquidated due to a margin call.

Long-term vs. Trading Positions

I emphasize again that long-term positions in silver that are fully paid-for should be held at this time. It is too late to sell in my opinion. However, some of you like myself may have both long-term and trading positions in silver. That is the strategy that silver guru David Morgan and others that I follow advocate. Whether that is a 75% (long-term) / 25% (trading) allocation or a 50-50 split is up to the investor. I sold part of my trading position two weeks ago in the silver ETF (NYSEARCA:SLV), but I did not sell any of my long-term holdings. I can only think of four reasons I would sell my long-term holdings:

  1. The Federal Reserve and/or the Bank of Japan end their QE (digital money creation) activities.
  2. Silver has another parabolic rise into the $40-$50 range (or higher) like it did in April 2011.
  3. The Commitment of Traders report indicates that the large speculators have a net long position that is too large. Maybe that would be about 50,000 to 60,000 contracts.
  4. A better investment opportunity comes up that I feel would offer better returns than silver. For example, if Apple goes under $300 or crude oil goes below $75.

There are probably some other reasons, but at this point holding a long-term investment in silver (and gold) makes sense. It should of course be a part of a diversified portfolio.

Disclosure: I am long SLV. 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.