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Summary

  • The price of silver continued to decline last week, which also pressure down silver ETFs such as iShares Silver Trust (SLV) and silver investments such as Silver Wheaton (SLW).
  • The upcoming non-farm payroll report could negatively affect the price of silver.
  • The modest rise of the U.S dollar against the euro may have also indirectly dragged down the price of silver.

The price of silver declined again during last week. Is silver bound to recover anytime soon? Let's examine the recent news that may affect silver and the silver ETFs.

The recent fall of silver has reflected in the decline in demand for silver ETFs such as iShares Silver Trust (NYSEARCA:SLV). During last week, the Silver Trust's price dropped by 2.3%. Other Silver investments such as Silver Wheaton (NYSE:SLW) also plunged by 7.5%. Looking forward, the upcoming non-farm payroll report, the progress of gold, and the direction of the U.S dollar could be among the factors affecting the price of silver. Let's examine these issues.

U.S labor market and silver

This week, the U.S non-farm payroll report will be released. In the previous report, 175,000 jobs were added during February - higher than expected. The table below shows the changes in the price of silver, USD/yen and the rise in employment.

Source: Bloomberg and U.S Bureau of Labor Statistics

As you can see above, a high gain in number of jobs tends to be negatively correlated with the price of silver. Moreover, the linear correlation between the shifts in employment and price of silver is -0.36, which is a mid-strong and negative relation. If the U.S employment continues to grow at a faster than expected pace, this could further drag down the price of silver. The ongoing recovery of the U.S labor market is also likely to increase the odds of the FOMC tapering again its asset purchase program in its next meeting, which will be held at the end of April.

Gold and silver

In previous months, the prices of gold and silver had a strong relation. But in the past couple of months, the correlation between the two metals has weakened. The chart below shows the linear correlations of the daily shifts of gold and silver prices in 2013-2014.

(click to enlarge)

Source: Bloomberg

As you can see, during February and March the linear correlation between silver and gold reached low levels. Thus, even if gold bounces back, the weaker correlation implies that silver won't necessarily follow and rally by a similar rate.

Besides the upcoming non-farm payroll report, the developments in the foreign exchange market could also play a secondary role in the silver market.

Silver and foreign exchange rate

During last week, the US dollar slightly appreciated against euro and yen but depreciated against the Canadian dollar and Australian dollar. The chart below presents the linear correlation of the daily percent changes of silver and leading currencies pairs during the month.

(click to enlarge)

Source: Bloomberg

As you can see, the linear correlation among euro/ USD, USD/ Canadian dollar and the price of silver are mid-strong. Therefore, the modest recovery of the U.S dollar against the euro may have partly contributed to the decline of silver. Looking forward, the upcoming non-farm payroll report and ECB rate decision could affect the direction of the euro/USD. These events, assuming all things equal and under certain assumptions, could partly affect the direction of silver.

Takeaway

The recent weakness in the silver market might continue especially if the U.S non-farm payroll report rise by a higher than expected rate, the gold market keeps slowing down and the U.S dollar appreciates again against the euro.

Source: Is Silver Bound To Recover?