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Summary

  • The price of silver bounced back last week, which also pulled up silver ETFs such as iShares Silver Trust (SLV).
  • The minutes of the FOMC meeting could also impact the silver market.
  • The depreciation of the U.S dollar against the Australian dollar and yen may have had a modest effect on the price of silver.

The price of silver slightly increased in the past week. Despite this modest recovery, silver is still around $19 to $20. Will silver's recent rally continue? Or will the upcoming release of the minutes of the last FOMC meeting drag down the price of silver? Let's examine the latest developments in the silver market.

The modest rise in silver has reflected in an increase in the demand for silver ETFs such as iShares Silver Trust (NYSEARCA:SLV). During the previous week, the Silver Trust's price rose by 1.03%. Conversely, some other silver related stocks such as Silver Wheaton (NYSE:SLW) declined by 1.4%.

In recent weeks, the volatility of silver has slightly increased, as indicated in the chart below of the average monthly daily changes in the price of silver.

(click to enlarge)

Source: Bloomberg

Despite this slight increase, the volatility is still low compared to the second half of 2013. The volatility is likely to remain low until a new development stirs up the precious metals market. The FOMC could be the one to shake up the silver market.

The FOMC and silver

This week, the FOMC will release the minutes of the recent meeting, which was held at the end of April. In that meeting, the FOMC continued its policy line and tapered again QE3 by $10 billion. This news had a short term negative impact on the price of silver. But over time, future tapers aren't likely to have a lasting adverse effect on silver. The chart below shows why.

(click to enlarge)

Source: Federal Reserve and Bloomberg

The chart above shows the growth in the U.S money base and the changes in the monthly average price of silver during 2013-2014. The rise in the U.S money base (due to QE3), should have, as it did in the past, augmented the demand for assets, which are considered safe haven investments such silver and gold. In reality, QE3 didn't have a positive impact on the price of silver. Moreover, since the FOMC hinted of tapering its asset purchase program in June 2013, the price of silver remained close to the $19-$22 range. These developments suggest that even if the FOMC keeps tapering QE3, it isn't likely to move silver from its current price range. So what will? The Fed's interest rate! The minutes could provide some additional information and insight behind the FOMC meeting and the deliberations regarding the timing of raising the cash rate. If the FOMC hints of raising its cash rate anytime soon, this could have a negative effect on the price of silver. The current estimates are that the FOMC will raise its cash rate within six months after the end of tapering QE3; at the current pace this could be around mid-2015.

The changes in the foreign exchange market could also play a secondary role in the silver market.

Silver and U.S dollar

During May (up to date), the U.S dollar slightly depreciated against the Australian dollar, yen and Canadian dollar. The chart below shows the linear correlation of the daily percent changes of silver and leading currencies pairs during May.

(click to enlarge)

Source: Bloomberg

As you can see, the correlations among leading currencies pairs and silver weren't strong in the past several weeks. In the past, these correlations tended to be stronger and more robust. Looking forward, if these correlations remain weak, the price of silver isn't likely to rise much as the U.S dollar keeps diminishing against leading currencies.

Takeaway

The upcoming minutes of the FOMC meeting could stir up the silver market if this report reveals some clues as to the timing of raising the Fed's cash rate. Based on the latest market developments the price of silver might slowly rise again during the week, but it will remain close to the $20 mark.

Source: Will Silver's Modest Recovery Continue?