Is Silver's Next Rally Around The Corner?

by: Lior Cohen


Silver declined again last week.

Other silver assets such as Pan American Silver and iShares Silver Trust also fell last week.

Next week’s FOMC meeting could impact the silver market.

The price of silver fell again last week. Will silver bounce back? This week several reports will be published that could move silver including U.S GDP for the second quarter, personal spending expenditures, non-farm payroll and the FOMC will update its monetary policy. Let's tackle these issues.

During the previous week, the price of silver fell by 1.3%. The silver ETF iShares Silver Trust (NYSLV) and Pan American Silver (NASDAQ:PAAS) also dropped by 0.75% and 2.4%, respectively. Conversely, Silver Wheaton (NYSE:SLW) inched up by 0.2% during last week.

FOMC and silver

The FOMC will convene for the fifth time this year between July 29th and 30th. The FOMC is expected to taper again its asset purchase program. In the past, the tapering decisions had a strong negative effect on the silver market, as indicated in the table below.

Source: FOMC's site and Bloomberg

Following the last FOMC meeting, however, the price of silver bounced back after Yellen's dovish statements in a press conference. This was the first rally silver had this year after an FOMC meeting.

This time, there won't be a press conference following the meeting. This means the only decision is likely to be related to the tapering of QE3. Therefore, this event is likely to have a modest (if at all) negative impact on the silver market.

M2 Money Stock and silver

One of the driving forces behind the rally of precious metals, in the past several years, is the fear of a sudden rise in inflation due to the FOMC's dovish policy. Specifically, the FOMC's asset purchase programs led to a sharp rise in the U.S money base. Alas, the jump in U.S. money base didn't result in a similar spike in M2, which is often used as an indicator for the progress in U.S inflation.

Source: U.S FRED and FOMC's site

The chart above shows the changes in the U.S. M2 and money base in the past several years. The U.S. money base spiked by 95% while the M2 grew by only 35% between 2010 and 2014 (up to July). Further, last year the money base increased by 40%, while M2 by 5%. Based on the above, the FOMC's policy hasn't increased M2 by a similar pace as the money base. This could be due to the banks' decisions to "sit on their cash hoards" and be more conservative than in the past when it comes to loans.

Thus, even though the FOMC has expanded the money base with its QE programs, M2 hasn't grown by a similar pace. This could imply that, for now, the fear of inflation hasn't been substantiated. But the ongoing rise in the money base is likely to keep the fear of inflation alive, which will maintain the price of silver at its current level.

This week's PCE report will show any changes to U.S inflation and thus could impact the silver market if it were to present a higher than anticipated growth rate.

Silver and U.S dollar

The U.S dollar continues to gain against leading currencies including Japanese yen and euro. The recovery of the USD may have contributed to the recent fall of silver due to the rise in the linear correlations among several currencies pairs and silver.

Source: Bloomberg

The strongest correlations were with the USD/Canadian dollar and USD/ yen. These correlations suggest, assuming all things equal, if the USD continues to pick up, the price of silver will follow and slowly fall. This week, the non-farm payroll report and GDP estimate for the second quarter will be the main reports that could change the direction of USD and thus indirectly impact silver. Currently, the market expects GDP grew by 3.2% during the second quarter. Analysts project the labor market rose by 230K during June. If these reports don't meet the current market expectations, they could pull up silver.


This week's FOMC policy meeting could pressure further down the price of silver, but this meeting isn't likely to have a substantial impact on the silver market. If the USD continues to appreciate against leading currencies, this could also have a modest adverse effect on silver. But until the FOMC comes with a clear guidance regarding its policy, the silver market is likely to remain in its $19-$22 range.

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.

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