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Summary

  • Silver inched up last week.
  • Other silver investments such as iShares Silver Trust, Pan American Silver and Silver Wheaton also rallied in recent weeks.
  • Next week’s U.S reports could curb down silver’s rally.

The recovery of the price of silver slowed down in the past week; it finished the week above the $21 mark - silver's highest level since mid-March. But the upcoming non-farm payroll report could change the course of this precious metal. Let's see why.

During the previous week, silver inched up by 0.75%. Further, other silver related assets also increased last week: Silver Wheaton (NYSE:SLW), iShares Silver Trust (NYSEARCA:SLV), Pan American Silver (NASDAQ:PAAS) rallied by 4.1%, 0.6% and 2%, respectively.

U.S. labor market and silver

This week the U.S. non-farm payroll report will be released. In the previous report, 217,000 jobs were added during May, which was in line with the market expectations. The table below shows the changes in the price of silver, USD/Yen and the rise in number of jobs.

Source: Bloomberg and U.S. Bureau of Labor Statistics

In the past, the rise in number of jobs tended to lead to an appreciation of the USD and a drop in bullion prices. Moreover, in the past, precious metals and change in number of added jobs had a strong correlation (under certain assumptions).

But the recent reports didn't seem to have the same impact on bullion prices, as presented in the table above. This might be due to the two factors influencing investors to move in two different directions: On the one hand, the recovery of the labor market tends to reduce the demand for investment, which are considered safe haven such as silver. On the other hand, the rise in employment brings the FOMC closer towards raising its interest rate, which could have a negative effect on silver (see more on this in my previous article). But considering the FOMC remains unclear about its future plans, my guess is that the former relation will hold up in the coming report.

Further, the last report led to a modest decline in the price of silver, as it showed a 217K gain in employment - in line with market expectations. This could imply if the upcoming report shows another gain in employment of over 200K, which is close to current market expectations, this result may have a modest negative impact on silver.

Silver and U.S. dollar

During June, the U.S. dollar slightly depreciated against the Yen, Australian dollar and Canadian dollar and remained nearly flat against the Euro. Despite the weakness of the USD, which coincided with the rally of precious metals, leading currencies pairs didn't have strong correlations with the daily changes in the prices of silver, as seen in the following chart.

(click to enlarge)

Source: Bloomberg

This could suggest that even if the USD keeps depreciating against other currencies, this turn of events won't have much of an impact on the progress of silver prices.

Conversely, the rise in the price of oil in the past couple of months coincided with the rally of silver. Furthermore, the linear correlation between oil price and silver price is close to 0.4, which is a mid-strong correlation (see the chart below).

Source: Bloomberg

Again, this relation should be taken with a grain of salt, but it could suggest the rally of oil, which was partly driven by the escalation in Iraq, may have partly contributed to the recent recovery of silver.

Takeaway

The recent recovery of silver might come to a halt if the U.S. economy continues to slowly recover. Specifically, if the upcoming non-farm payroll report exceed the current expectations of analysts and pass well above the 200 thousand number of jobs added in June, this could moderately pull down silver prices.

Source: Will Silver Change Direction And Fall?