The silver market isn't showing signs of recovery as the price of silver has declined during 2013. Furthermore, shares of silver related companies such as Silver Wheaton (SLW) also haven't performed well during the year. Will the price of silver and shares of Silver Wheaton change course and rally anytime soon? Let's analyze what is up ahead for the silver market and Silver Wheaton.
So what is ahead for silver and Silver Wheaton?
Silver Wheaton's Forthcoming Financial Report
Silver Wheaton will publish its fourth quarter financial report on March 21st. In anticipation for the financial report, let's check the company's performance: the company's operating profitability declined from 77% back in the second quarter of 2011 to 75% in the third quarter of 2012. The average price of silver fell during said time by nearly 15%. So the tumble in the price of silver had little adverse effect on the company's profitability. This could suggest that in the fourth quarter the profitability will remain above 75%.
The chart below shows the developments in the average price of silver and operating profitability of the company.
Until the financial reports come out it's worth noticing its latest acquisition. Silver Wheaton completed its agreement to acquire from Vale S.A (VALE) 25% of the life mine and the gold production in the Salobo Mine and 70% of the gold production of its Sudbury Mines. This agreement will slowly raise Silver Wheaton's exposure to gold from 12% to nearly 25% by 2018. This agreement might backfire if the price of gold, much like the price of silver, won't rise.
Let's turn to the silver market. If silver won't rise in the near future, the profitability and revenues of Silver Wheaton will be adversely affected by it. So will silver rally anytime soon?
Will Silver Price Rally?
The price of silver hasn't performed well during the year (up to date) as it has declined by nearly 5.3%.
Will silver bounce back anytime soon? One of the main factors that helped rally the price of silver in recent years were the actions taken by the FOMC to jump start the economy by expanding its balance sheet. This action to expand the U.S. money base led to a rise in demand for safe haven investments. Since 2012, however, the QE3 program didn't seem to help rally the demand for gold or silver. I have referred to this issue in depth in the past. Moreover, the shift in market sentiment in the U.S. including the rise in housing market, slow improvement in workforce, and rise in stock market also contributed to the fall in demand for safe haven investments including gold and silver.
The main event of this month will be the FOMC meeting that will be held on March 19th and 20th. In the previous meeting the FOMC didn't change its policy. Moreover, Bernanke stated in his recent testimony at the House of Representatives that the Fed will keep the current monetary policy; he also didn't give any timeframe as to when the Fed will end QE3. If in the upcoming meeting the FOMC will keep the policy unchanged and won't change its current outlook then the price of silver might react in the same manner as it did in the previous meeting.
As seen in the table below, in the recent meeting the Fed left its policy unchanged. The price of silver sharply rose on the day of the announcement only to tumble down the next day.
So we might see a sharp rise in the price of silver, but this rally might not last long.
My guess is that unless the upcoming financial reports of the company will show a higher than anticipated gain in the production, the company's stock isn't likely to rally. Moreover, with respect to the silver price effect, this metal hasn't performed well during the year to date and might continue to pull down. The upcoming FOMC meeting might help rally the price of silver if the Fed will keep its current policy unchanged and won't put a time limit on its current asset purchase program. But this rally, in my opinion, won't last long, and silver might resume its downward trend, which will also bring down shares of Silver Wheaton.
For further reading see" Gold and Silver Outlook for March 18-22."