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Shares of Silver Wheaton (NYSE:SLW) have done very well in recent weeks, following the company's positive financial results for the second quarter of 2012 -- during August, the stock rose by nearly 21%. In comparison, during the month the price of silver increased by 10.9%. iShares Silver Trust (NYSEARCA:SLV) also rose by 10.4%. Will Silver continue to trade up in the near future and, in the process, help maintain the recovery of Silver Wheaton's stock?

In the chart below are normalized prices of Silver Wheaton's stock, silver, and the S&P 500 (prices are normalized to Jan. 3, 2012). As you can see, Silver Wheaton hiked in recent weeks after the stock had tumbled between March and May 2012. As a result of this recovery, the stock is very close to the growth of the S&P 500 on a yearly scale. Furthermore, the price of silver hasn't performed well during the year so far, as it rose by only 4.7%.

Click to enlarge images.

The recent rally of Silver Wheaton was more related to the company's growth in operations than the rise in the price of silver. During the month, the linear correlation between silver and Silver Wheaton reached only 0.32. This means, under certain assumptions, only 10% of the stock's volatility could be explained by rise of silver prices. In comparison, during the year the correlation between the two reached 0.64. This last figure demonstrates that the price of silver is still an important component in affecting Silver Wheaton's stock, despite the recent fall in the correlation between the two.

There are renewed speculations that the Fed will introduce another quantitative easing plan in the near future -- the recent publication of the minutes of the FOMC meeting showed that more FOMC members lean toward another stimulus plan. Following the publication of the minutes, the prices of gold and silver hiked. But will the FOMC announce another QE program during the meeting to be held next month?

The U.S. economy showed, at best, few signs of recovery: U.S. GDP grew by only 1.7% during the second quarter of 2012, and unemployment decreased by less than 2 percentage points in the past two years. Furthermore, the currently low rate of inflation, core CPI, is at 2.1%, which is very close to the Fed inflation target and lowers concerns that the QE programs raised inflationary pressures (even though the FOMC expects a rise in inflation in the coming years).

These conditions make it bit easier to introduce another stimulus plan. Many bullion traders anticipate the upcoming speech by Chairman Ben Bernanke at Jackson Hole, who might hint of the future steps of the Fed. I guess Bernanke won't offer anything that could imply what is the next move of the FOMC.

Furthermore, I think that the FOMC won't announce of QE3 in the near future; the U.S. is currently in an election year and that will make it hard for the FOMC to introduce another QE program without the political stability that will accommodate it. There are also concerns as to whether another QE program will have as strong an impact as the first two had. There might be diminishing returns for this stimulus.

But without QE3, the price of silver might not break from its current range. I have referred in the past to the strong relation between the U.S. money base and the price of silver. The chart below presents the development of the U.S. money base and the monthly average price of silver between 2010 and 2012.

The hike in the price of silver between late 2010 and early 2011 coincided with a sharp increase in the money base following the introduction of QE2 in November 2010. Furthermore, the linear correlation between the two reached 0.4 during those years (the money base is lagged by one period).

Therefore, I still think that the FOMC won't introduce another quantitative easing plan in the near future. I also believe that without QE3 there is little chance to see a hike in the price of silver, and, by extension, Silver Wheaton will suffer from it.

For further reading, please see "Gold And Silver Outlook For Aug. 27-31."

Source: Will Silver Resume Its Rally And Pull Up Silver Wheaton?