Shares of Silver Wheaton Corp. (SLW) continue to rally: during the past three weeks the stock hiked by nearly 15.4%. In comparison, during the same time frame, the price of silver rose by 16.4%. iShares Silver Trust (SLV) also increased by 16.3%. Will the FOMC announce in the next meeting another QE program which is likely to pull up the price of silver, and by extension Silver Wheaton? Also, will ECB's upcoming rate decision and bond purchase program also affect the price of silver?
In the chart below are the normalized prices of Silver Wheaton, silver price and S&P500 (prices are normalized to April 2nd 2012). As seen, Silver Wheaton's stock and silver price hiked during last month. As a result of this rally, the stock has passed the growth of the S&P500. Nonetheless, the price of silver hasn't performed well during the year and is still slightly below the S&P500. The chart also shows the strong relation between Silver Wheaton and price of silver. During last month, the linear correlation between silver and Silver Wheaton reached 0.41. This means, under certain assumptions, nearly 17% of the stock's volatility could be explained by rally of silver prices. Therefore besides the development of Silver Wheaton's business developments, the price of silver is another contributor to the company's recovery.
Following the recent speech of chairman of the Fed, Ben Bernanke, at Jackson Hole, many bullion traders reacted very promptly to this speech, as gold and silver price hiked on Friday, August 31st; even though I didn't see any significant hints or statements that could allude to the future steps of the Fed.
The upcoming FOMC meeting to be held between September 12th and 13th could also positively affect the prices of gold and silver. Even if the Fed won't announce of QE3 and will just allude to the fact, it could rally bullion rates.
But I still think that the FOMC won't announce of QE3 in the upcoming meeting: the U.S is currently in an election year, and without political stability and fiscal action, this stimulus plan might have little impact on the market.
The U.S economy continues to show few signs of growth: the revised growth rate of the U.S GDP reached 1.7% during Q2 of 2012, and manufacturing PMI is still below the 50 mark. The upcoming U.S labor report (non-farm payroll report to be published on Friday September 6th) could affect the bullion market. If the report shows another positive month as in the previous report, in July the non-farm payroll rose by 163k, this could help rally commodities prices. On the other hand, this could lower the chances of the Fed to introduce another stimulus plan in the near future.
Without the announcement of QE3 it doesn't seem that the price of silver will continue to rally for a long time. This will also adversely affect the bottom line of Silver Wheaton.
From across the Atlantic there are still expectations that ECB will announce its bond purchase program that will help struggling countries in raising funds due to their debt crisis including countries such as Spain and Italy. Once the bond purchase program will be announced I guess it could help recover the Euro as this program will bring some stability to the EU and lower the risk attributed to the currency. But the actual announcement of the program could take time because the Germans are still reluctant to give a green light for this program.
On Thursday ECB will announce its interest rate for September. It is currently at 0.75% and some expect the ECB will cut the rate again by 25pp to 0.5%. The last time the ECB cut the rate was back on July 5th, back then ECB reduced the rate by 25pp to 0.75% which eventually led the price of gold and silver to tumble down following the announcement. They fell because of the decline in the Euro/USD. I suspect that if the ECB will cut again the rate, it could adversely affect the price of gold and silver on Thursday and perhaps even Friday.
The chart below shows the development of the linear correlation (moving correlation over 20 days) between the daily percent changes of Euro/USD and silver price. As seen, during the past couple of months the relation between silver and Euro/USD has tightened.
Therefore, I still think that the FOMC won't announce quantitative easing 3 in the upcoming meeting. The ECB could have a significant effect on the price of silver via the Euro/USD. The upcoming ECB rate decision and its bond purchase program could affect the price of the Euro in different direction, as stated above, which will affect not only the price of silver but also Silver Wheaton.
For further reading see "Gold and Silver Outlook for September 3-7"