The price of silver tumbled down during last week. The FOMC's decision to taper again its asset purchase program has pressured down the price of silver. Looking forward, will silver recover from its recent fall? Let's analyze the recent news that may affect silver and the silver ETFs.
The recent decline of silver has reflected in the drop in demand for silver ETFs such as iShares Silver Trust (NYSEARCA:SLV). During the previous week, the Silver Trust's price decreased by 5.3%. Other Silver investments such as Silver Wheaton (NYSE:SLW) also fell by 6.3%. During last week, Silver Wheaton's 2014 guidance update and quarterly earnings report were released and may have also affected the direction of its stock. Looking forward, the upcoming developments in the U.S. economy, and the direction of the U.S. dollar could be among the factors affecting the silver market. Let's examine these issues.
The FOMC tapers QE3 again
The Chair of the FOMC Janet Yellen decided to taper again the Federal Reserve's asset purchase program by $10 billion to $55 billion a month. The FOMC tapered QE3 for the third time. Following each of these decisions, the price of silver had a negative reaction and tumbled down the next day.
The table below shows the decisions of the FOMC in recent years, and the reaction of the silver market the day of the statement was published and the next day.
Keep in mind, however, even though the FOMC tapered QE3 in the past several months, the silver market rallied. Therefore, the latest negative reaction of silver price to the FOMC's decision might be short-term and silver might soon recover in the near future.
Albeit the FOMC tapered QE3 for the third time, its members still think the U.S. economy has more room for improvement:
"To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate."
Furthermore, the U.S. inflation is still low and the FOMC's recent outlook puts the 2014 inflation forecast at 1.3%-1.8% - still below the 2% target. Therefore, the FOMC is likely to maintain its cash rate low, even if the rate of unemployment falls below 6.5%.
Speaking of the U.S. economy, if it shows little signs of progress, this could also drive up the demand for investments that are considered safe haven such as silver. This week, the U.S. GDP growth rate, home sales, and durable goods reports will be released and could provide some information regarding the progress of the U.S. economy.
Besides the recent FOMC decision and the progress of the U.S. economy, the changes in the foreign exchange market could also play a secondary role in the direction of silver.
Silver and U.S. dollar
During the previous week, the US dollar changed direction and appreciated against Euro, Canadian dollar, and Australian dollar. The recent recovery of the U.S. dollar may have partly been due to the FOMC's recent taper decision. The chart below shows the linear correlation of the daily percent shifts of silver and leading currencies pairs during March.
As you can see the linear correlation among Euro/USD, USD/Canadian dollar and the price of silver are mid-strong. Therefore, assuming all things equal and under certain assumptions, if the US dollar changes direction and depreciates against the Euro and Canadian dollar, this could pull back up the price of silver.
The recent tumble of silver might change course and slowly recover especially if the U.S. economy shows little signs of progress, the U.S. dollar depreciates and the silver market corrects to last week's adverse effect from the FOMC's decision.
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.