The silver market in general, and the iShares Silver Trust ETF (NYSEARCA:SLV) in particular, have recently cooled down as the bearish market sentiment has subsided and the U.S. dollar resumed its upward trend. But this hasn't change the fact that interest rates are likely to slowly come down and the selloffs of equities could resume if the economic reports come short of market expectations.
The bearish market sentiment has subsided, for now
One of the reasons the recovery of SLV came to a halt is due to the recent change in market sentiment as equities started to climb back up. But the concerns for an economic slowdown could return if the upcoming economic data show lower-than-expected results or China's economic woes were to return to the spotlight. On a global scale, the IMF released last month its revised GDP outlook, in which the global economic growth was revised down by 0.2% to 3.4% in 2016 and 3.6% in 2017. And the U.S. GDP was also slashed by 0.2% to 2.6% for both 2016 and 2017. This week, the U.S. GDP for Q4 (second estimate) will be released. It's expected to present a growth rate of 0.5% - lower than the first estimate of 0.7%. Any lower growth rate could renew the bearish market sentiment and selloffs of equities, which could behoove the price of SLV; the demand for silver as investment could rise because some investors consider it a safe haven investment.
But market conditions remain favorable for precious metals, as long-term interest rates are still very low; and lower rates tend to coincide with rising bullion prices. Currently, the 10 year treasury bond dropped by 0.4 percentage points since the beginning of the year to 1.77% - the lowest level since the beginning of 2015.
And in terms of implied probabilities as presented by Fed-watch, the chances of a rate hike in March have dropped to close to 0%. And even the chances of a hike in December are down from close to 90% at the end of 2015 to less than 40% at this point.
In the past minutes of the January meeting the member of the FOMC didn't really know why the market is reacting too harshly even though the economic data, at least in the U.S. aren't too alarming. Perhaps the old saying by Paul Samuelson: "the stock market has called nine of the last five recession" is apropos to describe the current state in the financial markets.
In any case, it's worth noticing that the recent recovery in SLV, even though the bearish market sentiment was in part related to the economic woes of China - among the leading consumers of silver - reaffirms that the changes in the physical demand for silver play a much smaller role than the impact of growing demand for silver, much like gold, as investment in times of uncertainty.
Finally, the U.S. dollar also played a role in driving up the price of SLV; despite the rate hike in December, the greenback depreciated against major currencies including the Euro and Yen, year to date. The U.S. dollar is still likely to appreciate in the coming months, even without a rate hike by the Fed, on account of the expansionary monetary policy of other central banks including ECB and BOJ.
SLV could still resume its upward trend over the short run as long as the U.S. dollar remains weak against other currencies, long-term yields maintain their low level and the bearish market sentiment were to return. But if the concerns over a possible recession don't materialize and the U.S. dollar strengthens again, the recovery of SLV won't last long, and in the longer run could start falling again. For more please see: What's Next for Silver in 2016?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.