70% Chance Silver Will Decline During March-April

| About: iShares Silver (SLV)

By Ivan Y.

After a brutal 2013, silver has performed well so far this year (up roughly 13% as I write this), but as we turn the page from the seasonally strong period of January & February, what can silver investors and traders expect in March & April. I took a look at the performance of the spot silver price in March & April during the last 20 years to see if any meaningful conclusions can be drawn. The results were quite striking as you can see in the table below. In the past 20 years, silver has declined in price 70% of the time from March to April (from the closing price on the last day in February to the closing price on the last day in April).

These numbers are especially bad if you consider that silver has risen by more than 4x over the last 20 years from about $5 per ounce to where it is today. The average decline has been about 7%. Based on silver's current price, that would translate to a loss of roughly $1.50. However, despite the fact that silver usually drops during this period, in the years when it does rise it can have a spectacular rise (26.5% in 1995, 38.9% in 2006, 43.7% in 2011). Even a 12.8% rise in 2010 is pretty darn good. In baseball terms, it seems that silver usually strikes out during this period, but when it gets a hit, it's a grand slam.

Why does silver usually perform so poorly in March-April? It's likely due to a combination of factors, or perhaps there may be no reason at all. Since silver usually appreciates in January & February, one explanation may be that March-April is a time when silver takes a breather and consolidates its gains. Also, individuals raising cash to pay taxes in April could be a factor as well. Admittedly, this is a weak argument considering that hedge funds and commercial traders set the price of silver and individual investors really don't have much impact on the silver price of the futures market.

What can we expect this year? One thing that concerns me is that the RSI for iShares Silver (NYSEARCA:SLV) is almost at 70. Anything close to or over 70 is considered to be overbought.

The COT structure does not look bad. Last week, hedge funds covered their short positions on more than 10,000 contracts. That puts the COT structure at what I would consider to be a neutral position.

  • Small Speculators: 9,318 contracts net long
  • Hedge Funds: 23,535 contracts net long
  • Commercials: 32,853 contracts net short

The net long position by the hedge funds is at the highest level in about a year, but still historically low. It has been as high as 50,000-plus contracts net long in 2007, 2008, and 2010.

Final Thoughts

If history is any guide to the future, then the most likely scenario is for silver to fall during the March-April period. For long-term investors, a two-month downturn is meaningless if you believe that silver is headed higher in the long term. What does it matter if silver drops in the next several weeks if you are planning to hold it until 2016, 2018, 2020... It can even be an opportunity to accumulate long-term holdings in SLV or silver bars/coins if silver drops below $20 again.

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.