Has Silver Reached A Brick Wall?

| About: iShares Silver (SLV)


Silver resumed its rally last week.

Other silver investments such as Pan American Silver (PAAS) and Silver Wheaton (SLW) also continued to trade up last week.

This week, Yellen’s testimony could impact silver.

The price of silver resumed its upward trend as it reached its highest level since mid-March 2014. This week Janet Yellen will testify in Congress. This testimony could impact the price of silver.

During the previous week, silver rose by 1.5%. Moreover, other silver related stocks including iShares Silver Trust (NYSEARCA:SLV), Silver Wheaton (SLW) and Pan American Silver (NASDAQ:PAAS) also pulled up last week. These companies' stocks increased by1.3%, 2.6% and 1.2%, respectively.

Yellen and Silver

The minutes of the FOMC meeting, which were released last week, may have contributed to the recovery of silver. The dovish tone in the minutes may have been enough to bring back the demand for silver. After all, the prevailing low cash rates keep silver from tumbling down. Moreover, if the Federal Reserve leaves its cash rate for a longer than expected period of time, this could further pull up the price of silver.

This week, Janet Yellen, Chair of the FOMC, will testify at the Senate Banking Committee and the House Financial Services Committee regarding the Semiannual Monetary Policy Report. Any additional insight from Yellen could provide some more back-wind for silver, especially it she voices her concerns regarding the progress of the U.S economy and less about inflation.

Keep in mind, the Fed's decision to taper its asset purchase program has slowed down the rise in the U.S money base. But has the tapering of QE3 brought down the price of silver?

The chart below presents the progress of the U.S money base and the monthly average price of silver in 2013-2014.

Source: Federal Reserve website and Bloomberg

As you can see, the rise in the U.S money base at a slower pace didn't seem to have much of an impact on silver in the past several months.

Gold and silver

In recent weeks the correlation between gold and silver has strengthened as indicated in the chart below.

Source: Bloomberg

Based on the chart above, the linear correlation between silver and gold is currently over 0.9. This means, the recent rally of gold in the past few weeks is also fueling the upward trend of silver.

S&P500 and silver

Despite the modest rise of gold and silver prices in the past few weeks, the ongoing rally of the U.S equities market may have made investments such as silver and gold less appealing. The chart below shows the progress of the ratio between the S&P500 index and the price of silver in the past several years.

Source: Bloomberg and Google finance

This chart only serves to indicate the progress of silver with respect to the S&P500 index. Equities are considered alternative investments to precious metals. As the ratio rises, this means the S&P500 is outperforming silver.

As you can see, the ratio has picked up since mid-2011. Back then the ratio tumbled down to 34 points - close to the time when the U.S rating was downgraded. Silver's latest rise has brought the ratio slightly down. But as the U.S equities continue to progress, the silver market may keep losing its appeal.


The recent recovery of silver is likely to slo down in the near term. But as long as the Fed maintains its cash rate low and Yellen keeps making dovish remarks, gold and silver are likely to benefit.

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

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Tagged: , , Alternative Investing, Silver
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