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Summary The silver market cooled down in recent weeks. The rise in U.S. treasury yields and stronger U.S. dollar dragged down the price of SLV. The low price of silver didn’t raise the physical demand for silver. The silver market cooled down as the market is slowly adjusting to a possible rate hike by the FOMC in December. The price of the iShares Silver Trust ETF (NYSEARCA: SLV ) dropped by more than 8% since the beginning of the month. The lower price has yet to ramp up the physical demand for silver. The upcoming minutes of the FOMC meeting could revise market expectations with respect to the Fed’s rate decision, which could impact SLV. Even though the recent NFP report was better than expected and led the market to revise up the odds of a hike – the implied probabilities for a December hike grew to 70%; it’s still not a done deal that the Fed will raise rates in December. These odds could come down if the next NFP report in early December disappoints and the growth rate in wages declines again to around 2.2%. And these chances still suggest the market isn’t fully convinced of a rate hike this year. As long as there is uncertainty, the price of SLV is likely to benefit from it. This week, the minutes of the FOMC will be published. Last time, the FOMC issued a hawkish statement, in which it mentioned December as a possible timing to raise interest rates. In recent weeks, the U.S. dollar resumed its upward trend, and medium-term and long-term U.S. treasury yields bounced back. And if the upcoming minutes of the FOMC meeting were to present a hawkish stance, after all occasionally the minutes are revised up to their release, this could further boost the U.S. dollar and treasury yields – trends that are likely to bring down SLV. Another report worth noticing is the U.S. CPI, which will be published on Tuesday. The U.S. core CPI reached 1.9% – close to the Fed’s lower bound inflation target. But the weakness in the energy market could also trickle into the core CPI, resulting in a possible decline in the coming months. If the core CPI were to fall back down to 1.8% or lower, this could reduce the odds of a rate hike and slightly reduce the downward pressure on SLV. But let’s not only dwell on the demand for silver for investment purposes. Has the low price of silver drove up the physical demand for silver? On this front, in the U.S., the leading country in importing silver, the market has also cooled down in the past several months, as indicated in the following chart: Source: Bloomberg and U.S. Mint During the past month and a half, sales of American Eagle Silver reached a monthly average of 3.9 million ounces – nearly 16% lower than in Q3 2015, but 2.3% higher year on year. The amount of silver sold doesn’t seem to be strongly correlated with the monthly changes in the price of silver – the linear correlation is only -0.17. So, even if the price of SLV is expected to come further down, it’s not likely to push the demand for silver in the U.S. much higher. The decline in the price of SLV was inevitable as the Fed moves closer towards raising rates. The recovery of the U.S. dollar and rise in long-term yields have also helped push back down the price of SLV and erased its gains from October. This week’s release of the minutes of the last FOMC meeting could raise the chances of a December rate hike, which could also result in another blow for SLV. In any case, the bearish sentiment for SLV isn’t likely to dissipate anytime soon. For more, please see: Is SLV about to change course? Scalper1 News
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