Will Silver And Silver Wheaton Change Direction And Rise?

Includes: SLV, SLW
by: Lior Cohen

Precious metals prices resumed their downward trend in recent days. Shares of Silver Wheaton Corp. (NYSE:SLW) also haven't performed well, and declined. The budget talks in Congress, in an attempt to avoid the fiscal cliff, don't seem to have positively affected silver. Will the price of silver bounce back by the end of year? Will Silver Wheaton rally from its recent tumble? Let's explore these issues.

The price of silver didn't perform well in recent days even though on a monthly scale it increased by 5.2% (up to date). In comparison, Silver Wheaton's stock tumbled by 9.6%. Part of the drop in the company's stock might have been stem from the recent dividend payment. Furthermore, the decline in the divided payment from $0.10 in the previous quarter to $0.07 in the recent quarter may have also pulled some investors out of this stock.

During October and November, shares of Silver Wheaton declined by 7.7% and the price of silver by 1.6%. During this same time frame, the iShares Silver Trust (NYSEARCA:SLV) declined by 1.64 and the S&P500 index by 2.9%. Thus, in the past couple of months Silver Wheaton has underperformed not only the price of silver, but also the S&P 500 (prices are normalized to Sept. 28, 2012).

Click to enlarge images.

Despite the decline in shares of Silver Wheaton, the company's revenues might rise in the fourth quarter of 2012. The current average price of silver (October and November) is nearly $33. This price is nearly 6% higher than the realized price of silver in the third quarter of 2012. All things being equal, this means the price of silver will positively affect the company's revenues and earnings. The chart below presents the operating profitability of the company in recent quarters, the realized price of ,silver and the average price of silver for the fourth quarter of 2012.

The rise in the realized price of silver by 7% from $29.12 in the second quarter of 2012 to $31.16 in the third quarter contributed to the rise in company's operating profitability from 72% to 75%, respectively. Moreover, one of the reasons for the company's drop in revenues in the third quarter was due to delays in delivery. The total delayed amount comes to almost 2 million ounces. If the company is able to sell most of this delayed amount in the fourth quarter, it could suggest the company will sell its silver at a higher price in the fourth quarter than in the previous quarter.

Thus, if the price of silver remains higher than last quarter, this might lead to a higher profit margin. Will silver rally in the weeks to follow?

The weakness of silver is partly related to the recent appreciation of the USD against several currencies. During October and November, the USD appreciated against major currencies including the yen, British pound, and Canadian dollar by 5.4%, 0.9%, and 1.1%, respectively. On the other hand, the rally in the euro and Aussie dollar against the USD may have curbed the fall in the price of silver.

Recent reports suggest the U.S. economy is improving: U.S. housing starts rose during October by 3.6%, consumer confidence increased during November, and core durable goods rose last month. These reports, along with this month's strong numbers from the non-farm payroll report, may have lowered the odds of the FOMC intervening again in the U.S. markets. If the Fed won't intervene in the financial markets and if the U.S. economy continues to progress, this could deflate the prices of precious metals.

The current budget talks in the U.S. keep the uncertainty in the financial markets high, but it is likely to strongly affect the prices of bullion in the weeks to follow. In Europe, the recent budget talks during the EU Summit didn't go well, as the EU ministers of finance didn't reach an agreement on the multiyear budget talks. On the other hand, they have agreed on the recent Greek bailout fund. This news may have moderately affected bullion prices via the euro/USD.

Despite the fall in the price of silver, it might bounce back by the end of year. The U.S. budget talks could result in the price of silver rising in the weeks to follow. On the other hand, if during the last FOMC meeting for the year the Fed maintains its current monetary policy and if the U.S. economy continues showing signs of progress, those items could curb or even reverse the direction of silver -- and, by extension, Silver Wheaton.

For further reading, see" Will Gold Continue To Dwindle?"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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