Will Silver Remain Close To $20?

| About: iShares Silver (SLV)


The price of silver dropped again last week, which also pressured down silver ETFs such as iShares Silver Trust (SLV).

The U.S. retail sales, housing data and Philly fed reports could also impact the silver market.

The movement of gold could also affect the direction of silver.

The silver market cooled down in the past week. Will the price of silver remain close to $20? Or will it resume its downward trend? This week, several news items will be released and could influence silver investors. Let's analyze the main events and publications that may move silver and silver ETFs.

The recent fall in the price of silver has reflected in a drop in the demand for silver ETFs including iShares Silver Trust (NYSEARCA:SLV). During last week, the Silver Trust's price decreased by 2.2%. Moreover, some other Silver investments such as Silver Wheaton (NYSE:SLW) dropped by 3.2%. For Silver Wheaton, the company's recent quarterly earnings report may have also moved its stock. This week, the forthcoming speech of Janet Yellen, the U.S. housing data reports, retail sales, Philly fed survey, the progress of gold, and the direction of the U.S. dollar could affect the price of silver. Let's examine these issues.

U.S. economy and silver

The progress of the U.S. economy could play a significant role in determining the progress of silver. This week, the housing data reports (housing starts, building permits), retail sales and Philly fed survey could influence market sentiment. If these reports show progress in the U.S. economy, this could stir investors towards riskier investments such as equities. In recent weeks, the U.S. long term treasury yields didn't move much; this could indicate the demand for safe haven investment such as U.S. long term treasuries is stagnate. U.S. long term treasury yields and silver tend to be correlated.

The chart below shows the movement of the price of silver and U.S. 10 year treasury yields during April and May.

Source: U.S. Department of Treasury and Bloomberg

As you can see, both U.S. long term treasury yields and silver price haven't performed well in recent weeks. Thus, if the U.S. economy keeps progressing and the FOMC further tapers QE3, the demand for investments such as U.S. long term treasuries and silver is likely to soften.

Gold and silver

In previous years, gold and silver had a strong correlation. But in the past several months, however, the relation between the two metals has weakened. The chart below presents the linear correlations of the daily shifts of gold and silver prices during the past couple of years.

Source: Bloomberg

As you can see, the linear correlation between silver and gold remained relatively weak in recent months. Therefore, the gold market seems to have a weaker effect on silver than it had in the past. This means, even if gold resumes its rally, this might not be enough to pull up silver.

Silver and U.S. dollar

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

Source: Bloomberg

The U.S. dollar may have actually eased down the drop in the price of silver. Looking forward, the forthcoming U.S. economic reports including retail sales, Philly fed index report, consumer sentiment, housing starts, and jobless claims could affect the U.S. dollar against leading currencies.

Final note

The volatility of silver is likely to diminish this week due to the small (and significant) number of economic reports to be released. If these reports continue to show the U.S. economy is progressing, the demand for silver is likely to diminish. Nonetheless, my guess is that the price of silver will remain around $20.

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.