Will The Recent Recovery Of Silver Slow Down?

| About: iShares Silver (SLV)


The price of silver rallied last week.

The next FOMC meeting could impact the silver market.

The rally of silver also pulled up silver ETFs such as iShares Silver Trust.

The price of silver rallied for two consecutive weeks. Despite this recent recovery, silver is still around $19. This week, the FOMC meeting could stir up the bullion market and perhaps even curb down the recent recovery of silver.

The price of silver rose by 3.5% during last week. Further, several silver-related investments also increased last week: iShares Silver Trust (NYSEARCA:SLV) and Silver Wheaton (NYSE:SLW) fell by 3.5% and 7.8%, respectively. Despite the recent sharp rise in the price of silver the standard deviation of silver prices has diminished in the past several months, as indicated in the chart below.

Source: Bloomberg

But the FOMC's upcoming policy meeting, which will be held on June 17-18, and the press conference to follow could have a short-term effect on the price of silver. Let's see why.

Currently, the markets expect the FOMC to taper again its asset purchase program for the fifth time by another $10 billion to a purchase rate of $35 billion a month. This expected decision could have a modest negative impact on silver.

The table below shows the FOMC's past decisions and the impact they had on the price of silver the day of these decisions were released and the following day.

Source: FOMC's site and Bloomberg

In the past several monetary policy meetings the FOMC tapered QE3 and these decisions have dragged down the price of silver the next day.

Nonetheless, the adverse impact on the price of silver seems to have diminished in the past meeting, which might suggest the upcoming FOMC's meeting will have a modest negative effect on the price of silver.

But the main issue will remain the timing of the Fed's rate hike. In the past, when the Fed announced a rate cut or a commitment to hold rates low until 2015 (before that it was until the end of 2014 and so on), the price of silver spiked following these announcements. But in the past year, I also think the Fed's policy has kept the prices of gold and silver stagnate. One factor to consider is the ongoing promise of the Fed to remain vigilant of any shift in the long-term inflation. As long as there is a small to no chance of the Fed "leaving its post" and allowing to the U.S. inflation to expand above its target, say above 5%, the fear factor of a potential devalue of the U.S. dollar isn't going to happen and bullion isn't likely to rise any faster. This critic on the Fed's policy, without reference to gold, was made by Woodford (opens pdf) in his paper from back in 2012 (here is a really short summary by Krugman).

Following the FOMC meeting there will be a press conference, in which Chair Yellen may refer to the possibility and timing of the next rate hike. Thus, if she hints to this effect, this could have a much harsher negative impact on silver.

In any case, if the Fed keeps calming the markets of a potential inflation hike and hints of raising its short-term rates in the coming months, this is likely to drive precious metals prices down or at the very least maintain prices at the current levels.


This week's FOMC meeting could have a short-term negative impact on the price of silver, assuming the FOMC keeps tapering its asset purchase program. But if Chair Yellen refers to the timing of the next rate hike, this could a harsher negative impact on the silver market.

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