Is Silver Wheaton Changing Direction?

| About: Silver Wheaton (SLW)

The positive news for Silver Wheaton Corp. (NYSE:SLW) is that it had acquired from HudBay Minerals Inc. (NYSE:HBM) the life of mine silver production from its currently producing 777 Mine. Silver Wheaton will pay a total of $750 million for this mine. This news is likely to help rally Silver Wheaton's stock price in the near future and generate cash flow for the company. Even before this news came out, Silver Wheaton rose during the month. The company's stock rose by 4.1%; silver, by 0.6%. On the other hand, during 2012 the company's stock declined 5.7%; silver price, by 5%; iShares Silver Trust (NYSEARCA:SLV), by 5.4%. Since Silver Wheaton's stock is strongly correlated with the price of silver, if silver price recovers in the near future, Silver Wheaton's stock will follow. So what is the current status of the silver market?

Many bullion traders were disappointed from the recent FOMC meeting, in which the Fed didn't announce another quantitative easing, which, as I have pointed out in the past, tends to positively affect bullion prices. But since then there were some positive news items such as the higher than expected growth in number of jobs in the U.S that helped rally many commodities prices including silver.

Silver Wheaton, among the world's leading silver streaming companies, is strongly linked with silver price: during July and August the linear correlation between Silver Wheaton and silver price was 0.71 (the daily percent changes); therefore, under certain assumptions (including linearity and normality) the movement of silver price could explain nearly 51% of Silver Wheaton's stock variance.

In the last few days there seems to have been a change in market sentiment towards risk appetite, which could help rally commodities prices: The chart below shows the changes of silver price and 10 year yield during July and August. As seen, both indexes changed direction: after they had both declined during most of July, they have bounced back during the first few days of August. Further, the linear correlation between silver and 10 year yield (daily changes) is 0.4. This relation should be taken with a grain of salt as it fluctuates over time. But at face value this relation suggests the recent rise in LT yields coincided with the rally of silver price.

The rise in LT yields could suggest the recent market sentiment has shifted towards risk appetite. If the market sentiment will continue to move in this direction, this could result in the rally of not only stock markets but also commodities markets (including bullion).

I'm still skeptical about the recovery of silver in the near future. But there is a chance to see silver rising in the near future; if the market sentiment will continue to lean towards risk appetite, if the FOMC will eventually introduce in 2012 another QE program, then silver is likely to rally. For now, the recent news of Silver Wheaton will help its stock to rise.

For further reading: Gold and Silver Outlook for August

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.