What's Up Ahead For Silver?

Includes: AGQ, SIVR, SLV
by: Lior Cohen


The price of silver declined last week, which also dragged down silver ETFs such as iShares Silver Trust.

Janet Yellen’s speech didn’t have a strong impact on the price of silver.

The appreciation of the U.S. dollar against the euro may have dragged down precious metals prices.

The price of silver changed direction and declined during last week. Moreover, gold also declined by a similar rate. Will silver bounce back from its recent fall? 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 the previous week, the Silver Trust's price fell by 1.6%. Moreover, other Silver investments such as Silver Wheaton (NYSE:SLW) also dropped by 1.8%. Looking forward, the FOMC meeting, the U.S. durable goods, jobless claims, the progress of the U.S. equities markets, and the U.S. dollar could affect the direction of the price of silver. Let's analyze these issues and start with FOMC Chair Yellen's speech from last week.

Yellen and Silver

Last week, Janet Yellen, Chair of the FOMC, gave a speech referring to the FOMC's policy. She reassured that the Fed won't push the trigger on raising its cash rate anytime soon:

At present, the Committee anticipates that economic and financial conditions will likely warrant maintaining the current range "for the federal funds rate for a considerable time after (my emphasis with bold marking - LC) the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

Nonetheless, this speech didn't have a strong impact on the price of silver. Looking forward, the FOMC's monetary policy meeting will be held at the end of April and could affect the silver market.

Even if the FOMC tapers its asset purchase program again, it's likely to have a modest negative effect on the silver market.

The chart below shows the developments of the U.S. monetary base and the monthly average price of silver between 2010 and 2014.

Source: Federal Reserve website and Bloomberg

As you can see, the last asset purchase program augmented the U.S. monetary base but only had a short-term positive effect on silver. In fact, during the second part of 2013 and the beginning of 2014, the price of silver remained between $20 and $23. This could suggest that even if the FOMC tapers again QE3, this decision won't rattle the silver market and break silver free from its current price range.

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 the previous week, the U.S. dollar changed direction and rallied against Euro, Yen and Australian dollar. The chart below shows the linear correlation of the daily percent changes of silver and leading currency pairs during March and April.

Source: Bloomberg

Based on the above, the linear correlation between Euro/USD and the price of silver is mid-strong. If the U.S. dollar continues to strengthen against the Euro, this trend could drag further down the price of silver. The upcoming U.S. economic reports including core durable goods, new and existing home sales, consumer sentiment, and jobless claims could affect the U.S. dollar against leading currencies. These reports, in turn, assuming all things equal and under certain assumptions, could partly affect the direction of the price of silver. Moreover, if these reports show the U.S. economy is recovering, they could also pull up U.S. equities, which are considered alternative investments for precious metals.

Final note

The price of silver slightly declined last week but remained close to $20. The price of gold also didn't move much and is currently close to $1,300. These precious metals aren't likely to break free from their current level anytime soon. If the U.S. dollar keeps strengthening and the U.S. equities resume their upward trend, this trend could steer investors away from precious metals and back to equities. Therefore, my guess is that silver isn't going anywhere and will remain around $20 in the coming weeks.

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.