Silver: What Could Bring Its Rally To A Halt?

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Includes: PSLV, SIVR, SLV
by: Lior Cohen

Summary

SLV keeps benefiting from a weaker dollar and low interest rates.

As a result, the demand for silver coins has also jumped this year.

What's next for silver?

The weak U.S. dollar has helped drive up the price of the iShares Silver Trust ETF (NYSEARCA:SLV) this year. And even though the Fed is still expected to raise rates this year - the market estimates (at most) a single rate hike, while FOMC members think there will be two - the Fed is still perceived dovish, which keeps silver prices up. But this isn't the whole story. In recent weeks, China has released several economic reports indicating the country's growth is picking up again. And the demand for silver coins in the U.S. continues to rise. These developments suggest the demand for silver is on the rise.

Since the start of the year, silver has gone up by nearly 18%. The rise in silver price, justifiably, tends to be attributed to falling long-term interest rates, rising global economic uncertainty, and the devaluation of the U.S. dollar. And the rally of silver is also reflected in the stronger demand for silver coins, as indicated in the following chart:

Source: Bloomberg and U.S. Mint

The chart shows the quarter-by-quarter demand for American eagle silver coins in the U.S. - the world's leading silver importer - between 2014 and 2016, up to the first quarter.

During the first quarter of this year, sales of American eagle silver coins reached a monthly average of 4.9 million ounces, for a total of 9.8 million ounces for the quarter - which is 35% higher than in Q4 2015 and 145% higher year on year. And even though the stronger demand for silver on this front hasn't translated to a spike in silver prices, as indicated in the chart above, it still indicates the demand for silver as investment is rising in the U.S. again. The market may have also placed some weight on the positive news coming from China about the state of its economy; exports jumped by 11.5% back in March, and GDP grew by 6.7% - although the data coming from China is taken with more than a pinch of salt by the market. Nonetheless, at face value, this could be another sign for stronger demand for silver in one of the top silver consumers in the world.

Although the physical demand for silver is expected to rise this year, the main issue will remain what central banks will do, and how their actions impact the direction of major currencies. On this front, in the upcoming ECB policy meeting, Mario Draghi isn't expected to introduce new policy measures. But he will try to weaken the euro against the U.S. dollar by hinting at additional measures the ECB may introduce in the coming months. The Fed's April meeting is also likely to result with no major changes to policy. But again, the market will look for any hints of possible rate hike in June. If the ECB were to hint of new measures to follow, while the FOMC were to suggest of raising rates in the June meeting, this could bring back down the price of SLV.

Silver has benefited from the recent market developments, which also resulted in an increase in the demand for silver. But the main question for silver will remain around the monetary policy of the major central banks and changes in the market's estimates of a possible global slowdown. If these concerns were to subside, the Fed were to turn hawkish again, and other central banks were to turn dovish (by introducing new monetary stimulus), it could eventually bring SLV's rally 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.