What Could Pull Silver Back Up?

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 |  About: iShares Silver Trust ETF (SLV), Includes: PAAS, SLW
by: Lior Cohen

Summary

Silver changed direction and fell last week.

Other silver investments such as Pan American Silver (PAAS) and Silver Wheaton (SLW) also plummeted last week.

Silver may resume its rally if the FOMC maintains an unclear stand on the timing of the rate hike.

The silver market cooled down last week, despite the escalation in the relationship between U.S and Russia. Looking forward, what could bring back up silver?

During last week, the price of silver declined by 2.7%. The silver ETF iShares Silver Trust (NYSEARCA:SLV) also fell by a similar rate during last week. Silver Wheaton (NYSE:SLW) and Pan American Silver (NASDAQ:PAAS) also fell by 2.3% and 1.5%, respectively.

Yellen testifies - silver falls

Chair of the FOMC, Janet Yellen, testified in front of the Committee on Banking, Housing, and Urban Affairs. She did made some comments about the potential bubble in certain sectors in the equities market, which may have contributed to the fall of U.S equities. Some also speculated, she may have laid the ground work to justify a rate hike sooner than anticipated. This speculation was enough to bring down silver. Up to now, however, the uncertainty around the timing of a rate hike played in favor of the bullion market. Thus, even the slightest hint of such a rate talk was enough to bring down silver.

Nonetheless, my guess the FOMC won't pull the rate hike trigger or even allude to the fact any time soon. In such a case, silver will resume its slow recovery.

Oil and silver

The recent escalation in the relationship between the US and Russia may have contributed to the rise in prices of oil and silver at the end of last week.

Further, the linear correlation between oil and silver picked up and is close to 0.45, which is a mid-strong correlation.

Source: Bloomberg

Again, this relation suggests the rise in the risk factor was enough to bring commodities prices up and if this risk defuses in the coming days, oil and silver prices are likely to come down.

U.S short term treasuries and silver

The recent developments in the U.S treasuries market coincided with the progress in the price of silver. Specifically, the 3-year treasury yield moved in an unclear trend in the past few weeks (much like silver). Up to now, this yield is slightly up for the month. This implies the market is taking more risk and moving back to equities. It could also suggest that the FOMC may take a more hawkish stand, which could bring down the demand for U.S treasury bonds. This market tends to move in a similar direction as the price of silver, as you can see in the following chart.

Source: U.S Department of Treasury and Bloomberg

Moreover, the linear correlation between the daily changes in 3-year treasury yield and silver prices is -0.62, which is a very strong and negative correlation.

This is another indication for the strong impact the FOMC's policy has on the silver market.

Silver and U.S dollar

During July (up to date), the U.S dollar appreciated against leading currencies such as Euro, Australian dollar and Canadian dollar; it remained nearly flat against the Japanese yen. Nonetheless, the correlation between the daily changes of silver prices and the USD-Canadian dollar pair has strengthened during the past month, as indicated in the chart below.

Source: Bloomberg

These correlations suggest the modest recovery of the USD was partly related to the decline in the price of silver in the past month.

Final note

The silver market could resume its upward trend but not on account of a rise in the tensions between U.S and Russia. The FOMC's policy will remain the main driving force behind the price of silver. The next FOMC meeting at the end of the month could provide some additional insight behind the Fed's next move.

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.