The prices of precious metals haven't moved much since Sept. 13, following the FOMC decision to launch QE3 and keep short-term interest rates low until mid-2015. Will this anticlimax in the bullion market continue in the weeks to follow? Let's examine the recent developments surrounding the silver market.
Since Sept. 14, shares of Silver Wheaton (SLW) decreased by nearly 1.6%. In comparison, during the same time frame the price of silver slipped by 1.9% and the iShares Silver Trust (SLV) declined by 2.3%.
In the chart below are the normalized prices of Silver Wheaton, silver price, and the S&P 500 (prices are normalized to Sept. 14, 2012). As you can see, silver, the S&P 500, and Silver Wheaton's stock haven't moved much during recent weeks.
Click to enlarge images.
During September and October, the linear correlation between silver and Silver Wheaton was strong and positive at 0.77. This means that under certain assumptions (linear relation and normality of the data), nearly 59% of Silver Wheaton's stock price changes could be attributed to the movement of silver. Therefore, if silver won't rally in the near future, it could impede the recovery of Silver Wheaton.
Some might attribute the modest fall in the price of silver to the weak euro. Since Sept. 14, the euro depreciated against the USD by nearly 1.9%. Other "risk currencies" also depreciated against the USD during those weeks -- e.g., the Aussie dollar declined against the USD by nearly 3.3%. It should be noted that the recent decision of the RBA to lower the cash rate by 25pp weakened the Aussie dollar. The ongoing speculation around the future moves of Spain and whether it will ask the ECB to start the bond purchase program is dragging down the euro; as long as Spain prolongs this announcement, the downward trend of the euro may continue. Germany's stand in regard to rescuing Greece and Spain isn't helping the euro either. The recent report by the IMF about the grim outlook it has on the eurozone economy and recent speech of ECB Mario Draghi, who also projects slow progress in the eurozone in the years to come, didn't help the euro.
There is still a semi-strong relation between silver and the euro/USD, but the linear correlation between the two has declined in recent weeks (indicated in the chart below). Currently, the linear correlation between silver prices and the euro/USD is at 0.34. Furthermore, the linear correlation between Silver Wheaton's stock and the euro/USD is at 0.61. These correlations suggest that if the euro/USD remains weak, it could impede the progress of silver prices and Silver Wheaton's stock.
In the U.S., the news continues to cover the presidential race that will conclude Nov. 6; this means that until then, there won't be any fiscal decisions. The "fiscal cliff" will be the next big issue the newly elected (or re-elected) president will have to tackle; until the "fiscal cliff" is resolved, it could raise the amount of uncertainty around the U.S. economy. Furthermore, this planned reduction in the budget deficit is likely to raise the chances of the Fed introducing additional stimulus plans in the near future. On the other hand, the modestly positive news as indicated in the recent U.S. non-farm payroll report, in which 114,000 jobs were added in September, dragged down silver prices as it lowers the chances of the Fed intervening in the market to help rally the U.S. job market. This mixed signal is also a contributing factor to the unclear trend precious metals have experienced in recent weeks.
The effect of QE3 on the U.S. money base, which could also affect the price of silver, may take time. In the meantime, the price of silver and, by extension, Silver Wheaton might continue to zigzag with an unclear trend until after the election or until the Fed considers introducing additional monetary steps to jump start the U.S. economy. The weak euro may continue to curb the rise of silver, but this could change if Spain makes the request for ECB to commence its bond purchase program.
For further reading, please see""Gold And Silver Outlook For Oct. 8-12."