Is The Silver Market Heating Up?

Includes: PAAS, SLV, SLW
by: Lior Cohen


Silver rallied for three weeks in a row.

The dovish tone of the FOMC may have kept pulling up silver prices.

Other silver investments such as iShares Silver Trust, Pan American Silver and Silver Wheaton benefited from silver recovery;

The silver market continued to heat up last week and thus closed a third straight week of gains. The latest FOMC meeting concluded with no significant changes to its policy but the overtone of the FOMC statement and Chair Yellen's answers and statements in the press conference might have been enough to pull up silver close to $21 - its highest level since mid-March 2014. Will this recovery continue?

Last week, the price of silver increased by 6.6%. Moreover, other silver related assets also rallied last week: iShares Silver Trust (NYSEARCA:SLV), Pan American Silver (NASDAQ:PAAS) and Silver Wheaton (NYSE:SLW) rose by 5.8%, 7.2% and 10%, respectively.

In the recent FOMC meeting, the members decided, as expected, to taper QE3 again by $10 billion. But the main issue was the general tone of the FOMC statement, which was more dovish than in the previous one.

This year's economic outlook for the GDP growth rate was revised down due to the weak first quarter results. This week, the final estimate of the GDP will be released. If the estimate were to be revised down again, this could positively impact bullion prices.

In the press conference, Chair Yellen talked about the recent rise in the core CPI to 2% and dismissed it as noise. She refereed to the core personal consumption expenditure index as a more reliable measurement for inflation. Why does the progress of the U.S inflation important for silver?

One possibility is that the potential fear of inflation, partly stemmed by the FOMC's policy, may have steered investors towards precious metals, which, by many, are considered a safe haven investment against the devalue of the USD. Alas, the inflation, as indicated in the chart below with the core personal consumption expenditure index has slowly declined in recent years.

Source: Ycharts and Bloomberg

As you can see, the fall of the core PCE from 2% back in March 2012 to 1.42% in April 2014 coincided with the downward trend of silver price (average monthly prices). Since correlation, which isn't robust, doesn't imply causation, we can only assume a relation between the two time series. This relation, however, played a role in the rally of silver in the past (remember the high inflation rate in the early 80's, which coincided with a jump in precious metals prices).

So we should consider the relation of silver and inflation but take it with a grain of salt. In the past three reports, the PCE rallied, albeit it's still very low at 1.42% - well below the Fed's target inflation.

Thus, this week's PCE monthly update could influence silver investors: if the inflation slowly picks up, this may positively impact the price of silver. But this report also plays another role - influencing the FOMC members. If the inflation picks up above 2%, this could result in the Fed taking more hawkish decisions such as raising interest rates, which could adversely impact silver prices.

Final note

Over the long term (in the coming months), the rally of silver might not last long, especially if the U.S economy starts to show signs of recovery and if (and when) the FOMC raises its cash rate. In the short term, however, another disappointing GDP estimate and a modest rise in the PCE might be enough to keep the price of silver above the $20 mark. For more: 3 Reasons to Prefer Silver Wheaton Corp over Silver ETFs

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.