The recent fall of the price of silver has reflected in the decline in demand for silver ETFs such as iShares Silver Trust. During last week, the Silver Trust's price decreased by 3%. Silver related investments such as Silver Wheaton (NYSE:SLW) also slipped by 1.2% during last week. Looking forward, the developments in the U.S dollar, gold price, and the progress of the U.S economy could be among the factors affecting the silver market. Let's further explore these issues.
U.S labor market and precious metals
This week, the U.S non-farm payroll report will be released. This report tends to have a short term effect on the price of silver. In the previous report, only 113,000 jobs were added during January - well below the numbers anticipated. The table below presents the changes in the price of silver, USD/Yen and the rise in employment.
The disappointing labor reports seem to have had a positive effect of the price of silver when the change in employment is lower than expected. Moreover, the linear correlation between the shifts in employment and price of silver is -0.37, which is a mid-strong and negative correlation. Besides the non-farm payroll report, this week, other reports including the manufacturing PMI, which estimates the changes U.S manufacturing sectors, will be released. These reports regarding the manufacturing and labor markets provide an indicator for the progress of the U.S economy.
If the U.S economy continues to slow down, this could eventually affect the FOMC's decisions regarding its monetary policy. This could also steer investors away from equities and to safe haven investments such as precious metals and long term securities.
The developments in the foreign exchange markets could also affect the price of silver.
Silver and foreign exchange market
During the previous week, the US dollar depreciated again against Euro and Japanese yen but increased against the Australian dollar. The chart below presents the linear correlation of the daily percent changes of silver and leading currencies pairs during last month.
As you can see, the linear correlation among Australian dollar/ USD, Euro/USD and silver are mid-strong and positive. These relations imply, assuming all things equal and under certain assumptions, if the US dollar continues to fall against the Euro and the Australian dollar, this could positively affect the price of silver. The ECB will announce its rate decision this week. If ECB decides to cut down its cash rate again, this could adversely affect the Euro. On the other hand, the upcoming U.S reports including non-farm payroll, and manufacturing PMI could affect the direction of the U.S dollar. If these reports show a slow down in the progress of the U.S economy, they could pressure down the U.S dollar, and thus positively affect silver. The relation between gold on silver has diminished in the recent weeks.
Gold and silver
In the past the prices of gold and silver were strongly correlated. But during the past several months, the correlation between the two precious metals has weakened. The chart below presents the moving linear correlations of the daily changes of gold and silver prices during 2013 and 2014.
As you can see, during the past several weeks the linear correlation between silver and gold reached its lowest level. Therefore, even if gold continues to rally, the weaker correlation might suggest that silver won't necessarily follow by a similar rate.
Based on the above, I think silver may bounce back in the near future especially if the upcoming non-farm payroll report and manufacturing PMI disappoints again and the ECB leaves its interest rate unchanged. Finally if the US dollar continues to fall, it could also benefit the silver market.