Will Silver Continue To Rally?

by: Lior Cohen

The price of silver rallied during last week. Will the silver market continue to heat up? Let's examine the recent news that may affect silver (NYSEARCA:SLV).

The recent recovery of silver has also reflected in the rise in demand for leading silver ETFs such as iShares Silver Trust. During February, the Silver Trust's silver price increased by 4.4%, and the amount of silver in the Trust rose by 0.4% to 162.58 tons. The recent news regarding the progress of the U.S. economy may have contributed to the rally of silver price. Let's further explore this issue.

U.S. economy and precious metals

Last week, the U.S. non-farm payroll report was released. It showed only 113K jobs added in January - well below the numbers expected. This news had little positive effect on the price of silver. The table below shows the changes in the price of silver, USD/Yen and the increase in employment.

Source: Bloomberg and U.S. Bureau of Labor Statistics

In the last two meetings, the price of silver rallied following the past couple disappointing labor reports. Further, the linear correlation between the shifts in employment and price of silver is -0.34, which is a mid-strong and negative correlation. Besides the non-farm payroll report, other reports such the manufacturing PMI also showed a slower growth - the PMI fell to 51.3 - the lowest level in months, which means the U.S. manufacturing sectors are still growing but at a slower pace.

If the U.S. economy continues to slow down, this could eventually affect the FOMC to curb the tapering of its asset purchase program. These developments could also steer investors towards safe-haven investments such as precious metals and long-term securities.

Besides the developments in the U.S. economy, the demand for the physical metal could also play a secondary role on the price of silver.

Demand for the physical metal

The demand for silver has moved in different directions in recent months: In India, the demand for silver and gold plummeted by 69% during December, mainly due to Government's decision to increase tax on purchases of precious metals during last year. Moreover, the recent depreciation of the Indian Rupee against the US dollar may have also contributed to the softer demand for precious metals. Conversely, during December, Turkey's silver imports rose to reach 41.6 tons - nearly 36% higher than in November. Turkey has also augmented its gold hoards in the past several months plausibly due to the depreciation of its currency. Despite this mixed signal regarding the demand for silver, if the demand for silver picks up, this could also positively affect the price of silver. Besides the physical demand for silver, the relation of silver with gold may also partly affect the price of silver.

Gold and silver

In previous months the prices of gold and silver were strongly correlated. But in the past several weeks, the correlation has weakened. The chart below presents the moving correlation of the daily shifts of gold and silver prices in the past several months.

Source: Bloomberg

As you can see, the decline in the linear correlation in recent weeks might suggest the relation between the two metals has weakened. Therefore, even if gold continues to rally at a faster pace than silver, the weaker correlation might suggest that silver won't necessarily follow by a similar pace.

Final note

Based on the above, I think silver will continue to slowly rally. Next week, the FOMC will release the minutes of the last meeting, which could also affect the demand for precious metals (for investment). Finally, the progress of gold and the demand for silver (physical metal) could also play a secondary role in the progress of silver prices in the near future.

For further reading see: Will This Silver Company Do Better in 2014?

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.