Will Silver Break Free From The $20 Price Range?

| About: iShares Silver (SLV)


The price of silver remained unchanged last week, which also left silver ETFs such as iShares Silver Trust unchanged.

Janet Yellen’s speech could affect the price of silver.

The depreciation of the U.S dollar against the Euro may have pressured up precious metals prices.

The price of silver remained nearly unchanged during last week. On the other hand, gold bounced back following the release of the minutes of the last FOMC meeting. Will silver resume its rally anytime soon? Or will it tumble down? Let's analyze the recent news that may affect silver and the silver ETFs.

The stagnation of silver is reflected in the little change in demand for silver ETFs such as iShares Silver Trust (NYSEARCA:SLV). Last week, the Silver Trust's price inched up by 0.16%. Conversely, other Silver investments such as Silver Wheaton (NYSE:SLW) continued their descent and dropped by 2.2%. Looking forward, Janet Yellen's speech, U.S retail sales, Philly Fed index, the progress of gold and the U.S dollar could affect silver. Let's examine these issues and start with last week's release of the minutes of the last FOMC meeting.

The minutes of FOMC and silver

Following the latest FOMC meeting, the FOMC decided to taper again its asset purchase program. In the press conference, which accompanied the statement of the meeting, FOMC Chair Janet Yellen hinted that the FOMC could raise its cash rate by mid-2015 - nearly a year from now. This news dragged down the price of silver. But the minutes of that meeting eased down these speculations. They showed that FOMC members remain dovish and the timing of raising the Federal Reserve interest rate isn't clear:

"Members also considered statement language that would provide information about the anticipated behavior of the federal funds rate once it is raised above its effective lower bound. The Committee decided that it was appropriate to add language indicating that the Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

This means that even if the unemployment rate falls below 6.5% and the inflation rises to 2%, the FOMC is likely to maintain its cash rate until the committee agrees the economic conditions warrant a raise in its interest rate. On a related note, FOMC Chair Janet Yellen will give a speech titled "Monetary Policy and the Economic Recovery" at the Economic Club of New York. This speech could spark floodgates over raising the Fed's fund rate. If she hints again the rate hike could be as early as mid-2015, and this could drag back down precious metals prices.

Besides the upcoming news related to the U.S economy, the developments in the foreign exchange market could also play a secondary role in determining the price of silver.

Silver and U.S dollar

During last week, the U.S dollar sharply depreciated against the Euro, Yen and Australian dollar. The chart below presents the linear correlation of the daily percent changes of silver and leading currencies pairs during recent weeks.

Source: Bloomberg

According to the chart above, the linear correlation among Euro/USD, USD/Canadian dollar and the price of silver are mid-strong. Therefore, if the U.S dollar continues to weaken against the Euro and Canadian dollar, this trend could pressure up the price of silver. Upcoming U.S economic reports including consumer price index, housing starts, retail sales and Philly Fed index could affect the direction of the U.S dollar against leading currencies. These reports, in turn, assuming all things equal and under certain assumptions, could partly affect silver.

The recent decision of the FOMC to taper its asset purchase program didn't have a strong impact on the demand for U.S long-term securities. Moreover, long term yields have declined in the past couple of week, as indicated in the chart below.

Source: U.S Department of Treasury and Bloomberg

This downward trend suggests the market sentiment has shifted toward risk aversion. Furthermore, U.S long-term treasury yields and silver price tend to have a strong negative correlation, i.e. as the U.S LT treasury yields falls, the price of silver tends to rise. This finding suggests that if the demand for U.S long-term treasuries continues to rise, the demand for silver is also likely to strengthen.

Gold and silver

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

Source: Bloomberg

As you can see, during March and April the linear correlation between silver and gold was weak. Thus, even if gold keeps recovering, the weaker correlation suggests that silver won't necessarily follow and rise by a similar rate.


Based on the above, the price of silver isn't likely to pull back up enough to erase its March losses in the coming weeks, especially if Janet Yellen hints again about the Fed's plan to raise its cash rate by mid-2015. On the one hand, the ongoing weakness of the U.S dollar and recovery of gold are likely to pressure up the price of silver. On the other hand, the weaker than normal correlations with leading currencies pairs and gold suggest they won't have a strong impact on silver. Therefore, my guess is that silver will resume its slow recovery, but it will remain around the $20 mark.

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.