Where Are Silver And Silver Wheaton Headed?

Includes: SLV, SLW
by: Lior Cohen

The price of silver and Silver Wheaton (NYSE:SLW) remained nearly flat during the past several weeks. Furthermore, the positive effect of the decision of the FOMC to launch QE3 on the price of silver seems to have dissipated. What is next for silver and Silver Wheaton? Let's examine the recent developments adjacent to the silver market.

During October, shares of Silver Wheaton edged up by 0.1%. In comparison, the price of silver declined by 4.7%. iShares Silver Trust (NYSEARCA:SLV) fell by 4.6%.

The chart shows the prices of Silver Wheaton, silver, and the S&P 500 (all prices are normalized to Sept. 14, 2012). As seen below, silver and the S&P 500 have declined while Silver Wheaton stock has slightly increased during the past several weeks.

Click to enlarge image.

During recent weeks, the linear correlation between silver and Silver Wheaton remained strong and positive at 0.64. This means, under certain assumptions (linear relation and normality of the data), nearly 40% of Silver Wheaton's stock movement could be attributed to the shifts in the price of silver. Therefore, if silver does not start to pick up in the near future, it could impede the rally of Silver Wheaton. Despite the recent stagnation in the price of silver, the upcoming third-quarter financial reports of Silver Wheaton, set to be published on Nov. 5, might show growth in the company's revenues not only due to the rise in the price of silver, but also because of the company's expansion in its operations. During the third quarter, the average price of silver rose by nearly 1.6% compared to the second quarter of 2012. This price gain alone is likely to pull up the revenues of the company.

The upcoming EU Economic Summit could affect the forex and commodities markets. The Summit might ease some of the concerns many have in regard to the stability of the European Union. In particular, the Summit might address the debt crisis in Spain and Greece. If Spain makes a formal request for a bailout, that's likely to help rally the euro and, consequentially, pull up the price of silver.

Next week the Federal Reserve will convene again for its penultimate meeting for 2012. If the Fed even hints at additional monetary steps it is considering launching in the near future, this could help rally the prices of precious metals. Will the Fed make this move?

In recent weeks, there were several positive reports that suggest the U.S. economy is showing some signs of recovery. According to the U.S employment report, 114,000 jobs were added in September and the rate of unemployment fell to 7.8%. Retail sales rose by 1.1% in September, which was higher than many had anticipated. These reports might have adversely affected the price of silver as they have lowered the chances of the Fed intervening again in the financial markets. The U.S. core CPI rose again by only 0.1% in September and by 2% during the past 12 months. These figures suggest that despite the Fed's monetary policy in recent years, core inflation isn't passing the target inflation of the Fed -- the current target inflation is 2%. Thus, the low core inflation is likely to impede the progress of the price of silver (precious metals are considered a safe haven, among other reasons, in case the U.S. dollar is devalued).

The recent stagnation in the price of silver is likely to continue in the near future until the debt problems in the EU are resolved, or until the Fed makes another monetary move to jump-start the U.S. economy. This could also suggest that the stock of Silver Wheaton will remain flat until its third-quarter financial report is published.

For further reading, see" Gold And Silver Outlook For Oct. 15-19."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.