Shares of Silver Wheaton Corp. (SLW) didn't perform well during the month. The slight increase in the price of silver didn't seem to curb the tumble of Silver Wheaton's stock in recent days. There might be some lingering adverse effects from the third quarter financial reports of the company that were published at the beginning of November. Let's examine the recent developments in the silver market and see what is up ahead for silver and Silver Wheaton.
During the month Silver Wheaton has under-performed Silver and the S&P500. During November, shares of Silver Wheaton have declined by 10.3%. In comparison, the price of silver rose by 1.9%. iShares Silver Trust (SLV) also increased by 2.7%. The chart below shows the developments of the prices of silver, Silver Wheaton and the S&P500 index normalized to September 28th, 2012. As seen below, shares of Silver Wheaton has under performed the price of silver and S&P500 index. Most of Silver Wheaton's fall was in the past several days.
Based on the above, the recent drop in the company's stock didn't stem from the developments in the silver market. Moreover, the linear correlation between silver and Silver Wheaton has declined in recent weeks and reached nearly 0.45. This means that only 20% of the company's stock movement (under certain assumptions) could be due to the changes in the price of silver. The chart below shows the moving linear correlation between Silver Wheaton and silver price. As seen, in the past several weeks the linear correlation between silver and Silver Wheaton declined.
This fall in correlation could be due to the publication of the quarterly report. A drop in the correlation between silver and Silver Wheaton tends to occur around the time of publishing quarterly reports. This pattern suggests that the recent fall in the company's stock is less related to the changes in the silver market and more related to Silver Wheaton's financial situation.
The recent decline in the dividend payment of the company may have also influenced investors to pull back their funds from this stock. The company announced it will issue a $0.07 per common share dividend payment. In comparison, in the previous quarter the company's quarterly divided reached $0.1 per common share.
Another factor that could have also contributed to the decline in Silver Wheaton's stock is the recent bearish market sentiment. The S&P500 index has declined during the month by 1.7%. Moreover, the linear correlation between Silver Wheaton and S&P500 index is 0.47. This means, under certain assumptions, that nearly 23% of Silver Wheaton volatility could be attributed to the movement of the S&P500.
In the following days, it is likely that the relation between Silver Wheaton and the price of silver will strengthen. This will mean that the developments in the silver market will have a stronger effect on the stock of Silver Wheaton.
The price of silver isn't pulling up for now. The next FOMC meeting might positively affect the price of silver if the Fed introduces additional monetary stimulus. Up to now, however, the third quantitative easing, which was launched back in mid September, didn't seem to have much of a positive effect on the price of silver. Further, the USD remained strong against leading currencies. Between mid September and November 21st, the USD appreciated against the Euro by 2.4%; the USD/YEN rose by 4.2%, the Aussie dollar fell against the USD by 1.5%, the USD/CAD rose by 2.6%, and the British Pound fell against the USD by 1.8%. This sample of currencies pairs shows that the USD hasn't fallen despite the launch of QE3. Moreover, the core CPI in the U.S is still around the 2% annual rate. Therefore, there weren't any signs of the USD devaluing that will push investors to purchase precious metals.
The ongoing discussions in the US around the budget cuts that Congress needs to approve are likely to continue affecting the financial markets. By the end of the year, we might see a rise in the price of silver if Congress will continue to drag its decision regarding the fiscal cliff and if the Fed will intervene again in the financial markets. Until then we might continue seeing silver remaining at its current range of $31-$35.
For further reading see" Why Isn't Gold Pulling Up?"
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.