What Is Keeping Silver Down?

Aug.12.14 | About: iShares Silver (SLV)

Summary

Silver’s progress coincides with the movement in the U.S long term treasuries.

The price of silver fell last week even though gold rallied;

Silver stocks such as Pan American Silver (PAAS) and iShares Silver Trust (SLV) also bounced back last week;

The price of silver dropped again last week, even though gold rallied. Will gold pull silver back up in the near term? Let's review the latest developments in the silver market and examine the main news that could stir up the bullion market.

During the previous week, silver fell by 2.1%. The silver ETF iShares Silver Trust (NYSEARCA:SLV) also dropped by 1.7%. Conversely, other silver assets have done well last week: Silver related companies such as Silver Wheaton (NYSE:SLW) and Pan American Silver (NASDAQ:PAAS) rose by 1.9% and 2.4%, respectively.

Silver and gold

Following the last publication of the non-farm payroll report, in which 209 thousand jobs were added, gold rallied while silver slipped. This report was lower than expected and may have contributed to the weakness of the equities market and recovery of gold. Moreover, the linear correlation between gold and silver has slightly declined, as indicated in the chart below.

Click to enlarge

Source: Bloomberg

The chart shows the linear correlation between silver and gold is currently at 0.76, which is still a very strong and positive correlation. But this relation is also the lowest since March.

If gold continues to recover and silver doesn't follow, this could impede silver's recovery. But my guess is that this detachment won't last long and we should see a rise in their correlation over the coming weeks.

Looking forward, this week the JOLTS report will be release, which is a complementary report to the U.S non-farm payroll. This report is also well followed by the FOMC. If the report shows additional growth in the number of job openings, this could impact not only the U.S dollar but also bullion prices.

Silver and USD

Since the beginning of the month, the U.S dollar depreciated against leading currencies such as the Japanese yen and Euro. Nonetheless, the modest decline of USD seems to have had little impact on the direction of silver.

Source: Bloomberg

The strongest correlation was with the USD/ yen. But if the USD continues to slowly weaken against leading currencies, this won't be enough to pull back up silver.

U.S treasuries and Silver

Despite the drop in the price of silver in the past few weeks, it's still not far off from its range of the past several months - $19.5-$21.5. Silver isn't the only assets to experience an unclear trend. The U.S long term treasury yields have also moved nearly aimlessly in the past few weeks.

Source: U.S Department of Treasury and Bloomberg

Despite the fluctuations in the 7-year treasury yield during July and August, the yield slipped by only 0.04 percentage points (during the past month). Long term yields and silver price tend to have a mid-strong correlation; in the past month, their correlation was -0.35. Perhaps the speculations around the Fed's policy keep these two assets moving in an unclear trend. Next month's FOMC meeting could bring the one, in which FOMC chair Yellen announces of any clear changes to the Fed's policy. Until then, these assets aren't likely to do much.

Takeaway

The rise in gold and the fall of USD didn't help silver. This detachment, however, isn't likely to last long. Finally, the silver market is likely to see a sharp rise in volatility coming September close to the FOMC meeting. For more see: Will Silver Wheaton Reach Its Quarterly Goals?

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.