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Will Falling Silver Production Start To Impact SLV?

Summary The price of SLV lost 9% of its value during 2015. Silver production may drop in 2015 — for the first time in over a decade. As the deficit in silver keeps rising, this could eventually start affecting the price of SLV. The silver market didn’t have a good year as the price of the iShares Silver Trust ETF (NYSEARCA: SLV ) shed over 9% off its value. The direction of silver will continue to be dictated by the direction of long term interest rates and U.S. dollar (among other things that silver investors look for when investing in the precious metal). But what about the changes in the physical demand and supply for silver? After all, the ongoing low silver prices contributed to the decline in silver production this year – perhaps 2015 will be the first year since in well over a decade, in which production won’t rise. Will this be enough to drive up the price of SLV? I have already addressed the recent rate hike by the Fed and its impact on SLV. Currently, the market isn’t convinced the Fed will raise rates by another 1 percentage point as its members estimated in the last FOMC meeting. The implied probabilities , as collected by Fed-watch, suggest the market projects only two hikes of 0.25 basis points in 2016. If the Fed wind up raising by only 0.25bp or not raise at all, this could bring back down long term interest rates and perhaps even depreciate the U.S. dollar – two shifts that could behoove the price of SLV. What about the changes in production? According to the Silver Institute the balance between supply and demand was in deficit (i.e. the demand was higher than the supply). And this has been the case for the past 12 consecutive years . This year’s deficit is expected to settle at 21.3 million oz – the lowest deficit in a decade. This decline in deficit is mostly due to net outflows from ETFs holdings and derivatives exchange inventories. Basically, as the demand for silver as investment diminishes, it helps ease the physical deficit. But there is also the matter of falling production that could increase this deficit. Up to 2014, production has been rising. This year, however, it seems production hasn’t picked up and perhaps even slightly declined. Among the top leading countries the produce silver: Mexico, Peru, China, Australia and Chile, according to one outlet , total production in these countries is slightly down for the year (up to August) – by less than 1%. So it’s still unclear how the year will end for the silver balance. But even if this year the deficit expands again, it doesn’t mean this trend will be enough to push up the price of silver. The high deficit in recent years including 2013 and 2014 hasn’t helped rally the price of silver. But perhaps this could also be a matter of timing. Eventually the deficit in supply-demand balance will matter enough to pull up the price of silver, especially as silver loses its shine as investment. When will this happen? That’s unclear. Therefore, for the near term it still seems that the direction of SLV will be govern firstly by the changes in the demand for silver as an investment tool and only secondly by the changes in supply and demand for physical silver. This means the direction of the U.S. dollar, other precious metals – most notably gold – and long term interest rates will set the pace for SLV. In the coming months, I won’t be surprised if the Fed takes a more dovish tone than it took in its recent statement, which could actually slightly pull up SLV. Finally, in the medium term, the growing deficit in silver – mostly driven by falling production and rising physical demand – may take a bigger role in moving the price of silver. For more please see: What’s Up Ahead for Silver in 2016?

Will GLD Keep Losing Its Shine?

Summary The gold market is expected to be pressured down as the U.S. dollar resumes its upward trend and the Fed moves towards raising rates. The focus is shifting towards the Fed’s normalization path. The market estimates only two to three rate hikes next year. Shares of the SPDR Gold Trust ETF (NYSEARCA: GLD ) and price of gold climbed back up last week, in part as the U.S. dollar changed course and fell following the lower than expected rate cut by the ECB. In her recent testimony to Congress, FOMC Chair Yellen signaled the U.S. economy is ready for higher rates. And the last non-farm payroll report , in which 211,000 jobs were added back in November, reaffirmed market expectations for the Fed to raise rates this month. Labor market continues to improve The recent NFP report showed a bit higher than expected growth in number of jobs. Wages rose by 0.2%, month over month and by 2.3% for the year. And while not all figures in the report were good — the real unemployment (U6) edged up to 9.9% — it was still overall good enough to pave the way for a December rate hike. Thus, this jobs report along with Yellen’s testimony should have raised the implied probabilities of a rate hike but for now the odds are at 79% — little changed from the previous week. The problem with raising rates at this stage is that the core inflation is still low. And it will be even harder for inflation to rise as the Fed’s cash rates moves up. Nonetheless, as the Fed moves towards raising rates in the next meeting, the price of GLD could resume, even if over the short term, its downward trend. And once the FOMC raises rates this month, the median outlook the Fed targeted in September will be met, as indicated in the table below. Source: Fed’s website Even though the labor market is doing well enough to prompt the Fed to raise rates this month, this week the JOLTS report will provide another perspective about the progress of the labor market. The recent depreciation of the U.S. dollar, mainly against the Euro, came after the ECB didn’t introduce stimulus as the market expected. The recent break we had from the rally of the U.S. dollar has helped pull back up GLD. And the U.S. dollar is expected to resume its rally, which will keep pressuring down GLD. Looking beyond the upcoming rate hike, and assuming the Fed moves forward and raises rates this month, the outlook for the future hikes suggest only a few rate raises in 2016. If rates were to rise at a slower pace than previously expected, this could hold the price of GLD from falling next year. (click to enlarge) Source: Fed-Watch The table above shows the implied probabilities over the next FOMC meetings 2015-2016. Based on these figures, the market expects the target rate to reach 0.84% by the end of 2016 – over 0.5 percentage point lower than the FOMC’s median outlook of 1.375%. Based on the Fed-watch outlook, this implies two rate hikes next year of 0.25% (again, assuming the Fed were to raise rates this year). If this outlook will coincide with FOMC members’ estimates, then the Fed will revise down its projections in the next meeting. And downward revisions could partly offset the expected adverse impact the rate hike will have on GLD. If rates were to remain lower than currently expected next year, the downward pressure on GLD will be less intense. Bottom line The gold market isn’t expected to shine or see rising prices anytime soon, especially as the Fed moves towards raising rates in December and U.S. dollar keeps climbing against other currencies. But following the initial rate hike, which is likely to have a short term negative impact on gold prices, it will be more important to see how the Fed plans raising rates in 2016. The current market outlook aims towards only 2 to 3 hikes next year. Lower than previously estimated rates could hold GLD from plummeting, albeit this won’t stop the general downward trend. For more please see: ” Gold and Inflation – Is there is relation? ”

What’s Behind The Recent Rally Of SLV?

Summary The silver market heated up in recent weeks. What’s behind the recent rally in the price of SLV? A weaker U.S. dollar and falling long-term yields are part of the story behind the latest recovery in the silver market. The silver market has heated in recent weeks, which has also pushed up the price of the iShares Silver Trust ETF (NYSEARCA: SLV ). What’s behind the recent rally of SLV? Let’s examine what is keeping up the price of SLV, and what does it mean up ahead for the silver market? Is it just because of the weaker U.S. dollar? It’s hard to consider the rally in the price of SLV without taking into account the recent depreciation of the U.S. dollar. The chart below presents the traded weighted U.S. dollar index (normalized to 100 for the end of March) and the price of SLV over the past several months: (click to enlarge) Source: FRED and Google Finance As you can see, the U.S. dollar lost some ground since the beginning of the month after several U.S. economic reports came below expectations including the NFP report, retail sales, and JOLTS. And since the core CPI came a bit higher than expected – the annual rate reached 1.9% – the market has become even more suspicious as to whether the FOMC will actually move forward and raise rates anytime soon, let alone this year. But the chart above also shows that while the depreciation of the U.S. dollar may have slightly contributed to the rally of the SLV, it still did fall by much to explain such a spike in SLV’s price. It’s worth noticing, however, that this week’s ECB monetary policy could have an impact on the foreign exchange markets including the euro/USD. And if the ECB were to convey a dovish sentiment that may include plans to expand or extend the current QE program, this news could actually pull back up the U.S. dollar – something that could curb down the recent rise in SLV and perhaps even bring it back down. If we also look at the recent changes in the long-term treasury yields relative to SLV, we could see that haven’t plummeted and only slowly came down in the past few weeks, which could have also helped boost up precious metals prices. (click to enlarge) Source of data: Bloomberg and U.S. Department of the Treasury Based on the CME Group 30-Day Fed Fund futures prices, the market has lowered the implied probabilities for the Fed to raise rates in December to only 30% and for March 2016 to 52% – only a month ago, the odds were close to 50% for a December hike. The drop in probabilities, mainly due to weaker-than-expected economic data – mostly in the labor market – has provided backwind to the silver market. And although from the fundamentals point of view, the market continues to slowly tighten, there haven’t been enough new developments to warrant such a rise in the price of SLV. Bottom Line The last time the price of SLV rose so fast in a single month was back in January of this year. Back then, long-term yields also dropped and the U.S. dollar fell against major currencies. And the Swiss National Bank decided to end the pegging of the Swiss franc to the euro. These events boosted volatility and helped pull up SLV. This time around, we also see falling U.S. dollar and lower LT yields, and volatility may have subsided in recent weeks, it could still erupt as there are growing concerns over the progress of China and even the U.S. This current climate could change and drag back down SLV especially if other central banks (ECB and BOJ) continue to move forward and devalue their respective currencies and the Fed pull its rate hike. But as long as these central banks don’t move forward – the Fed by raising rates, and ECB and BOJ in expanding their QE programs – the price of SLV is likely to continue to remain its current level. For more please see: Is SLV about to change course?