The price of silver and iShares Silver Trust (NYSEARCA:SLV) declined over the past couple of weeks, but SLV is still up by nearly 9%, year to date. The latest robust non-farm payroll report was enough to bring down the price of SLV as the report raised the chances of rate hike by the Fed. Nonetheless, the market still expects, at best, one rate hike this year. And Yellen's recent talk reaffirmed that the Fed is likely to move very slowly in raising rates. For now, the weak U.S. dollar is enough to keep SLV up. And while the silver market is expected to be in a deficit this year (demand will be higher than the supply), this isn't likely to play a significant role in moving the price of SLV.
The dollar and SLV
One of the main factors that boosted the price of SLV is the depreciation of the U.S. dollar over the last couple of months. Chair of the FOMC Janet Yellen gave another dovish speech last week. And the mere hint of the FOMC maintaining its rates unchanged was enough to push down the U.S. dollar, as indicated in the following chart showing the relation between SLV and the trade weighted U.S. dollar index in 2015-2016.
Source: Google finance and FRED
As you can see, the U.S. dollar has devalued since the end of January; this downfall coincided with the rally of the price of SLV. Moreover, the linear correlation between the percent daily changes of the two time series is -0.487 - a significant and strong negative correlation. This isn't a surprising relation but implies, without considering other factors that could have impacted both data sets, the changes in the U.S. dollar could account for roughly 24% of SLV's variance (the r square).
So far, the mounting concerns over the progress of the global economy, mainly EU and Japan, have seem to outweigh the efforts of central banks - such as ECB and BOJ - to devalue their local currency with further monetary stimulus. Nonetheless, these efforts may eventually devalue the Euro and Yen against the U.S. dollar. And the upcoming Fed minutes may also shed some light on the deliberations of FOMC members; the minutes could also drive up the U.S. dollar if they show more members are inclined to raise rates soon. And this, in turn, will curb down SLV. Unless, of course, the bearish market sentiment and global economic woes persist - in such a scenario the demand for precious metals are likely to rise.
Silver market deficit
In the meantime, the physical demand for silver is expected to surpass total supply this year, according to one report (opens pdf file). The deficit in the silver market is projected to be mostly related to a contraction in supply - a drop of 5%, year on year. Considering silver prices are at their lowest level since 2010, silver producers are likely to slowly cut down production or at the very least reduce growth: BHP Billiton (NYSE:BHP), one of the leading silver producers, has cut its output back in 2015 by over 3%, year on year. And Pan American Silver (NASDAQ:PAAS), another major producer, estimates its 2016 output will decline by roughly 6% compared to last year. The demand, however, is also expected to rise this year across many sectors including industrial, renewable energy (solar panel), jewelry and coins. But this won't be enough to boost prices. After all, there were years in the past when the demand was higher than the supply; and back then it didn't result in a rise in prices. The main issues will remain the changes in the U.S. dollar, long-term interest rates, gold prices and the fear factor in the markets - silver, much like gold, is considered by some investors a safe haven investment in times of uncertainty.
In summary, SLV is likely to benefit from the weakening of the U.S. dollar, rally in long-term interest rates and rise in demand for precious metals in times of trepidation. This trend, however, may not last long if and once the efforts of central banks such as ECB and BOJ will start to bring down their currencies against the U.S. dollar. For more please see: Will Higher Physical Demand for Silver Drive Up SLV?
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