Will Silver And Silver Wheaton Bounce Back?

Includes: SLV, SLW
by: Lior Cohen

The price of silver and shares of Silver Wheaton Corp. (NYSE:SLW) have tumbled down in recent weeks mainly after the recent FOMC meeting, in which Bernanke opened the door for the Fed tapering its asset purchase program by the end of 2013. Will silver and Silver Wheaton bounce back in the coming months? Let's analyze the latest developments related to the silver market.

During June, shares of Silver Wheaton plummeted by 25%. By comparison, the price of silver tumbled down by 12.2%. iShares Silver Trust (NYSEARCA:SLV) fell by 16.6%.

So what's new for Silver Wheaton?

Second-Quarter Financial Reports

Silver Wheaton is likely to publish its second-quarter financial reports for 2013 during August. Until then, let's take a look at the potential drop in revenues and profit margin the company may endure due to the latest drop in the average price of precious metals during the second quarter of 2013. The table below shows the expected changes in the company's profit margin from selling gold and silver in the second quarter of 2013.

Moreover, since the company's gold sales are expected to rise in the second quarter of 2013, and since the profit margin of gold is lower than silver's, the profit margin of Silver Wheaton is likely to decline by roughly 5 percentage points. Silver sales are also likely to dwindle in the second quarter of 2013. Based on the current 2013 outlook and the current average price of silver, its revenues from silver could drop by nearly 22% (year over year). Despite the drop in revenues from silver, Silver Wheaton's revenues are expected to rise by nearly 7% mainly due to the increase in gold production.

Nonetheless, if the price of silver continues to fall, it may further lower Silver Wheaton's revenues and profit margins. So what's up ahead for silver?

Will Silver Continue to Fall?

One of the driving forces for the rally in silver in previous years was the Fed's monetary policy that includes augmenting the U.S. money base via its asset purchase programs. The Fed's recent QE3 program, in which it purchases $85 billion long-term securities and mortgage backed securities each month, seems to have had little positive effect on the price of silver in the past several months. The chart below shows the developments in the U.S. money base and monthly average price of silver in the past several years.

As you can see, the Fed's QE3 program is augmenting the U.S. money base but has failed to pull up the price of silver. One of the reasons for silver's fall is the CME's decision to raise the margins on precious metals. Another factor could be the rally of the U.S. stock markets, which offer an alternative investment for bullion. The low inflation expectations in the U.S. are also pulling investors out of silver as an inflation hedge. Finally, the strengthening of the U.S. dollar against several leading currencies has also indirectly resulted in weakening precious metals prices.

If this trend persists, we may see the price of silver falling even further. The drop in silver prices will keep slashing Silver Wheaton's profit margin and revenues growth in the following quarters. Therefore, even if Silver Wheaton keeps augmenting its gold production, the ongoing weakness in precious metals markets are likely to continue dragging down the company's stock. Moreover, the company's profit margin is likely to fall not only due to the drop in precious metals prices, but also due to the rise in gold production. If the Fed tapers QE3 in the coming months, we could see silver and gold prices remaining at the current low levels, which will maintain Silver Wheaton's low profit margins.

For further reading, see "Do Gold And Silver Protect You From Inflation?"

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.