The Fed Keeps SLV's Shine

| About: iShares Silver (SLV)


The FOMC revised down its outlook of the cash rate.

This news alone helped pull up the price of SLV.

But the slow shift in market sentiment and the expansionary monetary policy of central banks besides the Fed are likely to curb down the rise of SLV.

The latest FOMC meeting provided another boost to the silver market in general and iShares Silver Trust (NYSEARCA:SLV) in particular. This was done even though the Fed didn't change its policy. The FOMC only voiced concerns over the global economy and revised down the cash rate guidance as indicated by the dot plot. But will this be enough to keep driving up the price of SLV?

The Fed and SLV

Over the past few weeks, the greenback has been slowly descending against the majors including Euro, Yen and even the risk currencies such as the Aussie and Loonie. And a weaker U.S. dollar has, so far, provided back wind for the recovery of not only silver but also other commodities including copper and oil. The recent decision of the FOMC to lower its outlook vis-à-vis GDP growth rate, and more importantly, its cash rate has provided another blow for the U.S. dollar, at least in the near term. Despite the rhetoric the Fed is still on course to tighten its policy - i.e. raise rates or at the very least not introduce more stimulus. All awhile other banks including the ECB and BOJ are on course to provide more stimulus. Even former FOMC Chairman Bernanke thinks the Fed isn't likely to reduce rates anytime soon - although it's a viable possibility down the line if the economic conditions deteriorate.

In the latest statement, the Fed suggested to the market that the cash rate will remain low; not only by reducing the cash rate outlook in 2016, but also in the subsequent years including the terminal rate, as indicated in the following chart. The markets still expect no more than a single rate hike this year.

Click to enlarge

Source: FOMC

This news helped bring down long-term interest rates and the U.S. dollar - two developments that boosted the price of SLV. For now, this could help pull up SLV. But considering other central banks are on course to keep interest rates low - certainly not raise rates - and perhaps even introduce more stimulus (e.g. more QE), the U.S. dollar is likely to change direction and strengthen again, which will curb down the recovery of SLV. And then there is also the shift in market sentiment over the past few weeks.

Earlier this year, the markets were agitated over a possible dip into another global economic slowdown that will start from the emerging markets - mostly China - and in the process bring along with it the rest of the world including the U.S. Since then, China took steps to provide more liquidity to its economy and presented a five-year plan that aims at a growth rate of 6.5%-7%. This goal is expected to be reached via higher budget deficit and more stimulus.

The U.S. economy is doing much better than other G7 nations, and the growth rate is still expected to be above 2% this year. So while there are still concerns over a possible global economic slowdown, it seems the markets are less anxious over such a possibility as they were a few weeks back. This shift in market sentiment should have eased the rally of SLV, which is considered by many as a hedge against tail risk scenarios. So far, however, this hasn't stopped the rise of SLV on account of the weaker dollar and decline in LT interest rates.

Also, it's worth noticing that the demand for SLV has increased in the past few weeks, as indicated in the following chart of the total silver ounces that SLV reports to have.

Click to enlarge

Source: SLV's website

The bottom line

SLV has gained some back wind from the weaker dollar and lower LT interest rates. And the latest FOMC decision is likely to maintain this trend over the near term. But as markets slowly shift away from a bearish sentiment, central banks keep introducing more stimulus, and the Fed maintains its policy unchanged, the recovery of SLV is likely to come to a halt. For more please see: Is SLV about to change course?

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.