Will Silver Make A Comeback?

| About: iShares Silver (SLV)

Despite the recent fall in the price of silver during last week, silver is still up in January. Will silver resume its upward trend in the coming weeks? Let's analyze the recent developments that may affect silver (NYSEARCA:SLV).

The rally in silver price has also reflected in the rise in demand for leading precious metals' ETFs including iShares Silver Trust. During January, Silver Trust's price rose by 2.5%. The upcoming FOMC meeting may affect the direction of silver price. Let's take a closer look at this issue.

FOMC's monetary policy

The upcoming FOMC meeting will be Bernanke's last meeting as Chairman of the Federal Reserve. The current expectations are that the FOMC will announce another tapering of $10 billion. Thus, the long-term asset purchase program will decline to $65 billion a month. In the previous meeting, the decision of the FOMC to taper QE3 has resulted in a sharp drop in the price of silver the following day.

Source: FOMC website and Bloomberg

The table above shows the decisions of the FOMC in the past couple of years, and the reaction of silver price the day of the announcement and the next day. As you can see, in the last two meetings, the price of silver tumbled down the next day. Therefore, if the FOMC goes through and cuts down again QE3, this could result, all things being equal, in a short-term drop in the price of silver. Nonetheless, there is also a chance that the FOMC won't taper QE3 in the upcoming meeting: The disappointing non-farm payroll report and recent fall of U.S equities markets may have influenced FOMC members to defer the tapering of QE3 to the next meeting in March.

In the meantime, the potential tapering of QE3 again doesn't seem to draw much attention: The chart below shows Google Trends for the word "tapering" in the past month.

Click to enlarge

Source: Google Trends

As you can see, the word tapering hasn't been trending high in recent weeks. This could suggest that the uncertainty around the FOMC's next move isn't high.

Besides the FOMC's decision, the developments in the foreign exchange market could also play a secondary role in the progress of the price of silver.

Silver and currencies

The chart below shows the linear correlation of the daily changes of silver price and leading exchange rates in the past month.

Click to enlarge

Source: Bloomberg

As you can see, the correlations among silver, Aussie dollar/USD and USD/Yen are mid-strong. Further, during January, the US dollar strongly appreciated against the Aussie dollar but sharply depreciated against the Japanese yen. The FOMC's upcoming decision could affect the direction of the US dollar - another tapering of QE3 could positively affect the US dollar. If the US dollar starts to pick up against both of these currencies, this trend may pressure down the price of silver.

Final note

My guess is that silver will continue to fall in the very short term, especially if the FOMC decides to taper QE3 again and the US dollar continues to rally. But in the coming weeks, silver may rally if U.S equities continue to decline; the weak equities markets could steer investors to investments such as gold and silver. Finally, if the U.S economy shows signs of slowdown, this may increase the demand for precious metals.

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.