Will Market Sentiment Move Silver Prices?

May.27.14 | About: iShares Silver (SLV)


The price of silver remained relatively flat last week, which also kept silver ETFs such as iShares Silver Trust nearly unchanged.

The U.S. GDP for the first quarter could impact the silver market.

The shift in market sentiment could also affect the price of silver.

The silver market remained stagnate during last week. Due to this lack of movement, silver remained slightly below the $20 mark for the past month. Does the silver market bound to remain stagnate in the coming months? Let's analyze the latest developments in the silver market.

The price of silver inched up by 0.44% during the previous week. Conversely, several silver-related investments slightly depreciated during last week. These include: silver ETFs such as iShares Silver Trust (NYSEARCA:SLV), silver streaming companies such as Silver Wheaton (NYSE:SLW). The shift in market sentient could play a factor in determining the direction of silver.

Market sentiment and silver

In recent weeks, the silver market wasn't the only one to experience an unclear trend. The U.S. long-term treasury yields have also presented a similar movement in the past several weeks, as indicated in the chart below.

Source: U.S. Department of Treasury and Bloomberg

Despite the sharp movement in the 30-year treasury yields during the month, the yield slipped by only 0.07 percentage points (up to date). Even though long-term yields and silver price have a weak correlation, they usually tend to move in similar direction, especially with the current Fed's monetary policy. Further, the correlation between gold and 30-year treasury yields is much higher at -0.31, which is a mid-strong and negative correlation. This relation suggests the rise in demand for U.S. long-term treasuries coincide with the rise in demand for gold.

In both the silver and U.S. long-term treasuries markets, the ongoing tapering of QE3 didn't have a significant adverse effect on them. The recent release of the minutes of the April FOMC meeting didn't offer much more information about the future plans of the Fed including the timing of raising the interest rate. In most of the meeting the statements regarding the timing of raising the cash rate were a bit convoluted. Here is a sample:

"The Committee's discussion of this topic was undertaken as part of prudent planning and did not imply that normalization would necessarily begin sometime soon. A staff presentation outlined several approaches to raising short-term interest rates when it becomes appropriate to do so, and to controlling the level of short-term interest rates once they are above the effective lower bound, during a period when the Federal Reserve will have a very large balance sheet. "

Until it will become clearer the timing of raising the cash rate, the silver market, much like the U.S. treasuries market, is likely to remain in its current price range. Once the market sentiment moves towards taking more risk, the demand for investments, which are considered safe haven, could diminish.

In the mean time, the progress of the U.S. economy could play a role in shifting the price of silver. The main report to be released this week is the second estimate of the GDP for the first quarter. The preliminary estimate showed a very modest gain of only 0.1%. If the upcoming report presents a higher rate, this could have a positive impact on the U.S. dollar, positively influence the FOMC members to raise the cash rate sooner than later, and thus this report may have a modest negative effect on silver prices.

Final note

The upcoming release of the updated GDP estimate for the first quarter could drag down the price of silver especially if this report shows a much higher than expected growth rate. If the market sentiment shifts towards taking more risk, both U.S. long-term treasuries and silver market aren't likely to benefit from this shift, which could drag further down the price of silver.

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.