The silver market continued to cool down last week. The recent economic reports from the U.S., including the GDP, non-farm payroll and press release of the FOMC meeting may have contributed to the weakness in the silver market. Despite the recent fall in prices, silver remained at $20-$21 in the past few weeks. Will the price of silver move from its current price range?
During last week, the price of silver declined by 1%. Other silver assets have also weakened last week: The silver ETF iShares Silver Trust (NYSEARCA:SLV) traded down by a similar rate. Silver related companies such as Silver Wheaton (SLW) and Pan American Silver (NASDAQ:PAAS) also fell by 2.3% and 2.5%, respectively.
U.S. labor market rose by a slower than expected rate
Last week's U.S. non-farm payroll report showed a 209,000 gain in number of jobs during July, which was slightly below market expectations. The ADP expected the job gain to reach 218,000 and analysts projected the figure to be close to 230,000. Even though, this gain was sizable, well above the natural population growth, and roughly close to the average growth in jobs in the past several months, the market's reaction was a bit bearish: U.S. equities slipped, and the price of gold bounced back (even though silver slipped). Usually, when the labor market progresses, the market's reaction tends be strongly negative for gold and silver - more investors steer away from precious metals when the U.S. economy is picking up. But the market expectations before the release of the non-farm payroll report seem to also play a role in this mixture.
The table below shows the gain in employment during 2013-2014, the ADP expectations, the shift in expectations, and the silver market's reaction to this news.
As you can see, the correlation between the variation from market expectation in job gains and silver prices is mid-strong and negative at -0.33. This correlation is stronger than the relation between change in employment and price of silver, which is only -0.19. This could suggest, the market's reaction tends to pull up silver when the non-farm payroll doesn't reach market expectations and vice versa. This was the case in 13 out of the last 20 non-farm payroll releases.
Thus, if the labor market shows progress and meet expectations in the next month's report, silver prices could keep slowly falling.
The FOMC concluded its fifth meeting of the year with no big surprises and little change in the wording to its press release. The Fed tapered again its asset purchase program by another $10 billion to $25 billion a month. This decision seems to have had a modest negative impact on the price of silver as the statement was slightly more hawkish due to the ongoing recovery in the U.S economy.
One of the key sentences from the recent press release is:
"Inflation has moved somewhat closer to the Committee's longer-run objective. Longer-term inflation expectations have remained stable".
As the FOMC leans (ever so slowly) closer towards raising the cash rate, precious metals are likely to come down over the long run.
The next FOMC event will be the release of the minutes of this past meeting on August 20th. The minutes could offer some additional insight behind the FOMC's last decision and its future plans.
The ongoing recovery of the U.S. economy, along with the (very) slow shift in the FOMC's tone, could keep impeding the progress of silver in the near term and thus maintaining silver in its current price range at $20-$21. For more see: Silver Outlook for August 4-8
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