A couple of weeks before the FOMC announced on September 13th it will start QE3, the prices of gold and silver increased. Since then, however, the prices of precious metals haven't moved much. This raises the question: will the price of silver continue to rise in the near future due to the effects of QE3? Since September 14th, shares of Silver Wheaton (SLW) declined by nearly 1.4%. In comparison, during the same time frame, the price of silver edged up by 0.1%. iShares Silver Trust (SLV) slipped by 0.3%. Let's examine the recent developments adjacent to the silver market.
In the chart below are the normalized prices of Silver Wheaton, silver price and S&P500 (prices are normalized to September 13th). As seen, Silver Wheaton hasn't perform well in the past several weeks.
During the month , the linear correlation between silver and Silver Wheaton remained high at 0.77. This means, under the assumptions (linear relation and normality of the data), nearly 59% of the stock's movement could be explained by changes in the price of silver. I conclude that silver affects the stock price of Silver Wheaton and not the other way around because the silver market is a much bigger market than Silver Wheaton's market cap; second, silver's price affects the revenues of Silver Wheaton and other silver streaming companies. Thus, if silver won't resume its upward trend, it could impede the progress of Silver Wheaton.
Why hasn't silver gone up since the announcement of QE3? To answer this question it's worth considering the relation between QE3 and silver and the recent developments in the U.S, Europe and Asia.
The effect of QE3 on the bullion market may take time; it is likely to span over a course of the next several months. Further, the announcement of QE3 was long overdue and many traders had expected it to start for over a year. As I have showed in a recent post, according to Google Trends the term "QE3" peaked around September 2011 following the downgrade of U.S credit rating. This finding suggests that some of the rise in the price of silver up to the September FOMC meeting was due to anticipation of many bullion traders and investors for another QE program.
The Fed and other economists are concerned that QE3 will have a lesser effect on the U.S economy than QE2 or QE1 had. Further, these programs didn't drag down the USD compared to other currencies.
Despite QE1 and QE2, the U.S inflation remained around the 2% mark. Since one of the reasons investors purchase silver is to protect their money from a rise in inflation, I suspect the currently low inflation has calmed down investors from the possibility of roaring inflation (at least for now).
Finally, in the previous programs also took time until they started to pull up the price of silver (after considering the initial market reaction). Back in November 2010, when QE3 was announced, the price of silver rose in December by nearly 9%. In January 2011, however, the price of silver declined by nearly 10%. Only since February 2011 the price of silver started to pick off.
There are a couple of positive signs that show some progress in the U.S economy: U.S manufacturing PMI rose for the first time in four months above the 50% mark; U.S non-manufacturing PMI also increased to reach 55.1 for September. If Friday's non-farm payroll report will show growth of above the 120k in jobs this could also be a positive sign. Nonetheless, the U.S economy is still not out of the woods and until there will be a sustainable growth in employment; it is likely that the Fed will come up with additional steps to jump-start the economy.
Bernanke's recent speech pointed out that the Fed may keep the low interest rates even beyond mid-2015, the current pledge of the FOMC, even if the economy will recover.
Thursday's publication of the minutes of the September's FOMC meeting could offer some insight behind the recent FOMC monetary decision. The minutes may also hint what is up ahead for the FOMC vis-à-vis its monetary policy.
There is still high uncertainty around the debt crisis in Europe. Thursday, the ECB President left the Euro cash rate unchanged at 0.75%. This news may have among the factors to pull up the Euro and consequently gold and silver prices. Draghi didn't make any big announcements but repeated that ECB is ready to commence its bond purchase plan. Spain hasn't made the official request to start the ECB bond purchase program. Until this issue among ECB, Germany and Spain will be resolved the USD is likely to remain strong compared to the Euro.
Asia & Oceania
The Fed isn't the only one trying to stimulate its economy. Monetary and fiscal steps were recently taken by China, Japan and Australia to stimulate each one's respective economy.
China's plan to stimulate the economy by investing in infrastructure didn't seem to have much of an effect on the price of bullion. There are speculations around the future steps China will take to stimulate its economy. Further, the decision of BOJ to expand its monetary asset purchase plan by 10 trillion yen ($128 billion) didn't seem to have much of apparent effect on the forex markets. RBA surprised this week by cutting the Aussie cash rate by 25pp to its lowest level since 2009.
The bottom line is that the price of silver may resume its rally in the near future especially if the Fed will introduce additional monetary steps. In the meantime, the recent decisions of the major central banks to stimulate their respective economies and the uncertainty around Europe's debt crisis may have contributed to the slow progress of silver and by extension, Silver Wheaton.
For further reading see" Gold and Silver Outlook for October"