The drop in silver price has also reflected in the drop in demand for leading silver ETFs such as iShares Silver Trust. During January, the Silver Trust's silver price decreased by 1.7%. The last FOMC meeting may have contributed to the decline of silver price. Let's further explore this issue.
FOMC's monetary policy and U.S economy
Last week, the FOMC decided to taper again QE3 from $75 billion to $65 billion; this news pressured down the price of silver.
The table above shows the silver market's reaction to the FOMC's decisions in 2013 and 2014. In the last three meetings, the price of silver tumbled down. If the FOMC continues to cut down its asset purchase program at its current pace, this could adversely affect the price of silver in the short term. But the FOMC might slow down its tapering process. The upcoming non-farm payroll report will be released at the end of this week. In the previous employment report, only 74 thousand jobs were added. This news resulted in a sharp rise in the price of silver. The table below shows the changes in the price of silver, USD/Yen and the rise in employment.
As you can see, the price of silver spiked in the past employment report. The US dollar depreciated against the Yen. Further, the linear correlation between the changes in employment and price of silver is -0.35, which is a mid-strong and negative correlation.
If the upcoming labor report shows another small gain in the labor market, this could positively affect the price of silver on Friday. Moreover, in such a scenario, this report could raise the chances of the FOMC slowing down the tapering process in the coming meetings.
Besides the developments in the labor market, the debt ceiling debate could also steer investors towards safe haven investments such as U.S treasuries and precious metals.
The FOMC will release the minutes of the last meeting on February 19th. The minutes might provide some insight behind the making of the last decision and what is up ahead for the FOMC's monetary policy.
Silver and US dollar
The developments in the foreign exchange market may also play a secondarily role in affecting the price of silver. The chart below shows the linear correlation of the daily percent changes of silver and leading currencies pairs.
As you can see, the linear correlation between USD/Yen and silver is mid-strong and negative. This relation suggests, assuming all things equal and under certain assumptions, if the US dollar continues to depreciate against the Japanese yen, this could have a positive effect on the price of silver. Other currencies, however, have depreciated against the US dollar.
Based on the latest developments, I think silver might slowly recover, especially if the labor market's progress slows down. The upcoming non-farm payroll report, the debt ceiling debate, and the minutes of the FOMC meeting could play a role in affecting the price of silver. Finally, in the long run, as long as the FOMC maintains its current low interest rate low, the price of silver is likely to trade close to the $20 mark.
For further reading see: Gold and Silver Outlook for February