The silver market has been cooling down in recent weeks. But will the upcoming minutes of the FOMC meeting jump start the silver market again?
During last week, silver dropped again by 2.1%. The silver ETF iShares Silver Trust (NYSEARCA:SLV) also shed 1.7% off its price. Moreover, the major silver stocks also such as Silver Wheaton (NYSE:SLW) and Pan American Silver (NASDAQ:PAAS) fell last week by 3.6% and 5%, respectively. These companies also presented less than impressive second quarter earnings reports, which may have also contributed to their last week's losses.
Silver and FOMC
The FOMC will release on Wednesday the minutes of the last FOMC meeting. In the past meeting, the release seems to have had a negative impact on the bullion market as indicated in the table below.
But as you can also, see there has been a bit of a seesaw movement in the price of silver from one FOMC meeting to the next. It appears that every time the FOMC's tone turns a bit more hawkish, the FOMC slightly changes the wording of the press release in the following meeting with a more dovish tone. In any case, the upcoming minutes could reveal some additional hints regarding the future steps of the FOMC. Once it becomes clear when the FOMC raises its cash rate, this could have a negative impact on the silver market, which mostly strived when the cash rate was very low.
This upcoming release could also increase the volatility of silver prices, which has eased down in the past several weeks.
Source of data Bloomberg
The chart above shows the standard deviation of silver prices (daily percent changes for each month) in the past year. During August (up to date), the standard deviation of silver slipped to 0.95% - the lowest level in over a year.
A change to the silver fix
In the silver market, the new electronically fixed silver benchmark rolled out last week. This means the old silver fix, in which a panel of three banks in a private conference call set the silver benchmark, was retired. The new electronic benchmark - named the London silver price - will be set by CME, Thomson Reuters and LBMA at noon London time.
It's still unclear if this new system were to impact the silver market in any way. For one thing, the silver market could use some more transparency and lower volatility. But this new silver benchmark doesn't seem to deal with these issues.
S&P500 and silver
The recent weakness in the bullion market coincided with the ongoing recovery of the U.S equities markets, which are considered an alternative investment to precious metals. The chart below presents the progress of the ratio between the S&P500 index and the price of silver in the past several years.
This chart only serves to indicate the progress of silver with respect to the S&P500 index. Equities are considered alternative investments to precious metals. As the ratio rises, this means the S&P500 is outperforming silver.
As you can see, the ratio has been recovering in the past few months mainly due to the rally in the S&P500 in the past several months. If the S&P500 continues to recover, this could further steer more investors away from bullion and into equities.
The silver market could keep showing weakness if the minutes of the past FOMC meeting keep the Fed's dovish tone. If U.S equities continue to slowly recover, they could also steer more investors away from silver and into equities. For more see: 3 Takeaways from Silver Wheaton's Earnings
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