Will Silver's Rally Last?

Apr. 7.14 | About: iShares Silver (SLV)

Summary

The price of silver bounced back last week, which also pulled up silver ETFs such as iShares Silver Trust and silver investments such as Silver Wheaton.

The upcoming minutes of last FOMC meeting could affect the price of silver.

The modest rally of the U.S. dollar against the Euro may have curbed down the recovery of the price of silver.

The price of silver changed direction and rallied 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 modest recovery of silver has reflected in the rise in demand for silver ETFs such as iShares Silver Trust (NYSEARCA:SLV). During the previous week, the Silver Trust's price inched up by 0.5%. Conversely, other Silver investments such as Silver Wheaton (NYSE:SLW) continued to fall and shed 1.6% from its value. Looking forward, the minutes of the last FOMC meeting, the JOLTS survey, the change in demand for silver in India and the U.S. dollar could affect silver. Let's analyze these issues.

U.S. economy, FOMC and silver

During last week, the U.S. non-farm payroll report showed 192,000 jobs added in March - this number was close with the market's expectations. Nonetheless, the market's reaction wasn't positive and following the release of this report, precious metals rallied, while the U.S. dollar depreciated against leading currencies. The table below presents the price of silver, USD/Yen and the change in employment during 2013 and 2014.

Source: Bloomberg and U.S. Bureau of Labor Statistics

The linear correlation between the changes in employment and price of silver is -0.344, which is mid-strong and negative. This relation suggests, whenever the labor market doesn't grow by a high pace (and doesn't beat the expectations) the price of silver tends to fall.

The upcoming JOLTS report regarding the labor market (job opening, hires etc.) could offer additional information regarding the progress of the U.S. work force.

Besides the developments in the labor market, the minutes of the last FOMC meeting will be released on Wednesday. This report could offer some insight behind the Fed's last tapering decision and perhaps some clues as to when the FOMC will start raising its cash rates. Both decisions could have a strong negative effect on the price of silver.

Silver and U.S. dollar

During the previous week, the U.S. dollar slightly appreciated against Euro, Yen and Canadian dollar. The chart below shows the linear correlation of the daily percent shifts of silver and leading currencies pairs during the past several weeks.

Click to enlarge

Source: Bloomberg

Based on the above, the linear correlation among Euro/USD, USD/ Canadian dollar and silver are mid-strong. Thus, the slight gain of the U.S. dollar against the Euro and Canadian dollar may have curbed down the modest rally of the price of silver. The minutes of the last FOMC meeting and the producer price index could affect the direction of the U.S. dollar against leading currencies. These reports, assuming all things equal and under certain assumptions, could partly affect the path of silver price.

The demand for silver in Asia mainly in India could also play a secondary role in affecting the price of silver.

Silver in Asia

Even though during 2013 the demand for silver in India reached a record high of 5,478 tons, this year silver imports have been falling: In March silver imports reached only 410 tons - nearly 250% lower than in March 2013. Some analysts suspect the decline in demand for silver is because of the import duty on silver. Looking forward, analysts speculate the government may ease on the gold import restrictions, which could drive back up the demand for gold and reduce the silver imports. India accounts for nearly 20% of world's demand for silver. Thus, if India's silver consumption falls, this could also pressure down the price of silver.

Takeaway

The recent rally of silver market might come to a halt especially if the U.S. JOLTS survey show promising figures, the minutes of the FOMC meeting reveal some information regarding the future steps of the FOMC, the demand for silver in India keeps falling, and the U.S. dollar resumes its rally against the Euro.

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.