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Summary

  • The silver market has cooled down last week following the higher-than-anticipated gain in number of jobs added in February.
  • The depreciation of the U.S dollar against leading currencies including the Euro and Australian dollar may have also indirectly curbed down the drop in the price of silver.
  • The drop in demand for precious metals in Asia especially in China and India are likely to also play a secondary role in pressuring down the price of silver.

The price of silver resumed its downward trend during last week mainly on Friday. What's next for the silver market? Let's analyze the recent news that may affect silver (NYSEARCA:SLV).

The decline of the price of silver has reflected in the drop in demand for silver ETFs such as iShares Silver Trust. During the previous week, the Silver Trust's price fell by 1.3%. Silver related investments such as Silver Wheaton (NYSE:SLW) also declined by 1.4% during the previous week. Looking forward, the progress of the U.S economy, the changes in demand for silver in Asia, and the direction of the U.S dollar could be among the factors affecting the silver market. Let's further examine these issues.

U.S labor market and silver

Last week, the U.S non-farm payroll report was published. This time, 175,000 jobs were added during February -higher than anticipated. This report showed a higher number of jobs added than in December and January. The table below presents the changes in the price of silver, USD/Yen and the increase in employment.

Source: Bloomberg and U.S Bureau of Labor Statistics

As you can see above, a high increase in the number of jobs tends to be negatively correlated with the price of silver. Further, the linear correlation between the changes in employment and price of silver is -0.36, which is a mid-strong and negative correlation. If the U.S employment continues to improve, this could further pressure down the price of silver. This week, several reports including the retail sales and consumer sentiment will be released. These reports provide an indicator for the progress of the U.S economy. If the U.S economy shows signs of slow recovery, this could eventually affect the FOMC's monetary policy. This could also reduce the demand for investments such as silver and bring investors back to the equities markets.

The changes in the foreign exchange markets could also affect the price of silver.

Silver and foreign exchange market

During last week, the US dollar depreciated again against Euro and Australian dollar but appreciated against the Japanese yen and Canadian dollar. The chart below shows the linear correlation of the daily percent changes of silver and leading currencies pairs during February and March.

(click to enlarge)

Source: Bloomberg

As you can see, the linear correlation among Australian dollar/USD, USD/Canadian dollar and silver are robust. These relations suggest, assuming all things equal and under certain assumptions, if the US dollar appreciated against the Canadian dollar and the Australian dollar, this could drag back down the price of silver. The upcoming U.S reports listed above could affect the U.S dollar. If these reports show the U.S's economy is recovering, they could pull up the U.S dollar, and thus adversely affect silver. The demand for silver in Asia mainly in China and India could also play a secondary role in determining the price of silver.

Silver in Asia

In India the demand for silver spiked during 2013 to a record high of 5,478 tons, mainly due to the Government's decision to raise import taxes on gold. But the current expectations are that the demand for silver in India will come down in 2014. Back in January 2014, the precious metal's imports in India declined. Some analysts expect the government will bring down taxes on gold, which will reduce the demand for silver, an alternative metal for gold. In the meantime, however, the government recently raised again import tariff on gold and silver.

In China, the demand for silver tumbled down by 37% during 2013. Analysts estimate the demand for silver in China will continue to fall in 2014. If these two economies continue to reduce their sliver imports, this trend could curb down the recent recovery of silver.

Bottom line

Based on the above, I think silver's rally might slow down especially if the upcoming U.S economic reports show signs of progress, the U.S dollar resumes its recovery and the demand for silver in Asia continues to fall.

Source: What's Next For Silver?