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The Fed Provided A Short-Term Boost To SLV

Summary The FOMC meeting concluded with a dovish statement and press conference. The silver market benefits from a dovish Federal Reserve. A potential rate hike could have a modest, negative impact on the price of SLV. The FOMC, as expected, didn’t raise rates and presented a dovish statement without dissenters. This news provided some backwind to the iShares Silver Trust ETF (NYSEARCA: SLV ) that came up in the last few days, albeit it’s still down by 8.5% over the past month. Let’s examine the recent FOMC meeting and its possible implications on SLV. Following the recent FOMC statement and press conference, the market revised down its outlook of the Fed’s rate “lift off”: The implied probabilities dropped to a 17% chance of a rate hike in September and 57% in December. In January 2016, the odds are 72% – nearly the same odds for a December rate hike only a week ago. The statement, which wasn’t changed much and didn’t offer any major headlines, still led to a modest rally in the price of SLV, as presented below. The dovish tone in the statement and Yellen’s press conference that followed suggested that even after the inaugural “lift off”, the FOMC will keep rates low – conditions that benefit the silver market. (click to enlarge) Source of data taken from FOMC and Google Finance The FOMC revised down its projections for the 2015 U.S. GDP growth rate from 2.5% in March to 1.9%. The rate of unemployment slightly increased to 5.25%. There weren’t any other major changes in the FOMC’s economic projections. Since Yellen reiterated that the first rate hike will still be data dependent, this means that if in the next few months the economic data show a stable recovery, e.g. NFP reports keep showing steady growth in jobs, lower unemployment, faster growth in wages, better GDP figures, higher inflation (just to name a few), the FOMC could decide to raise rates this year. As long as the FOMC keeps rates low, the silver market in general and SLV in particular benefit from it. Also, even if the FOMC were to start raising rates, the cash rate is likely to remain low, as Yellen suggested in the press conference, for a while. After all she tried, yet again, to diverge the attention from the historic first rate raise to the pace of subsequent rate hikes. She emphasized that rates will rise gradually; as such, this means the normalization policy is likely to have a modest adverse impact on SLV. In terms of the dot plots, FOMC members are still incline to raise rates this year, perhaps by September – this will allow for at least two rate hikes of 0.25% and bring the cash rate to 0.5% by the end of the year. For 2015, the median target range of the Federal Reserve hasn’t changed – it’s at 0.625% – albeit fewer FOMC members have picked higher rates and the projections are now more concentrated around lower interest rates, as you can see below: Source: FOMC’s website For 2016 and 2017, members slightly lowered their projections so that the median point declined by 0.25 percentage points for each year. This is another dovish indication that the trajectory of the future rate hikes could be more moderate than previously projected. Source: FOMC’s website In a CNBC interview, Richard Fisher, who is considered a hawk and was former president of the Federal Reserve Bank of Dallas and FOMC voting member, stated the dot plot outlook for the coming years is less relevant since the current members may not be there to make rate decisions in 2016-2017. This may be right, but since Yellen will remain at the Fed, we are still likely to see additional dovish FOMC decisions in the coming years. The market’s reaction to the dovish statement also included a depreciation of the U.S. dollar against leading currencies, which also contributed to the modest rise in shares of SLV. Nonetheless, the U.S. dollar could start to rise again especially against the euro – the ECB’s QE program and the ongoing Greek debt crisis are likely to drag down the currency – and yen. A stronger U.S. dollar could play against the price of SLV. The silver market isn’t out of the woods, but the FOMC provided a short-term boost to SLV. The market doesn’t seem convinced that the Fed will raise rates this year. As such, if and once it will occur, it could result in a modest drop in SLV prices. Until such time, as long as the FOMC produces dovish statements, silver will benefit over the short run. For more see: Will Higher Physical Demand for Silver Drive Up SLV? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

Will Yellen Move The Price Of SLV?

Summary The price of SLV fell down in the past week. Will Yellen’s testimony move the price of SLV? The rally in the U.S. treasury yields coincided with the drop in silver prices. The silver market cooled down in the past week as shares of the iShares Silver Trust ETF (NYSEARCA: SLV ) fell by 6%. For SLV, the upcoming testimony of Yellen and the latest developments in Europe could curb further down SLV. Yellen testifies Following the release of the minutes of the FOMC meeting, the upcoming testimony of FOMC Chair Yellen will take the center stage this week. Yellen will testify on Tuesday and Wednesday before the Senate Banking Committee and House Financial Services Committee, respectively. The latest minutes were perceived a bit dovish. After all, the probabilities of a rate hike have gone down a bit for both July and June compared to previous weeks. Because of the dovish tone in the minutes, some market analysts think that Yellen’s testimony will be a bit more hawkish – given the strong numbers presented in the latest non-farm payroll report, this scenario is plausible. But Yellen isn’t likely to rock the boat and reiterate that a decision on a rate hike will be data dependent. Since the FOMC is slowly adjusting the markets for a rate hike in the coming months, it’s unlikely that there will be a surprise or significant delay. This is true because central banks tend to “surprise the markets” and change the market expectations when it comes to stimulating the economy. When it comes to austerity and rate hikes, central banks tend to be much more cautious, prudent and give enough time for the market to adjust to the new policy. The biggest fear of a central bank is that its policy change will lead to an economic slowdown or even recession. Besides Yellen’s testimony, the second estimate of the U.S. GDP for the fourth quarter will be released on Friday. In the first estimate, the GDP growth rate was 2.6%, which was a bit lower than market expectations. If the GDP growth rate comes lower than current estimates, which are 2.1%, this news may bring back up the price of SLV. Another report worth considering is the U.S. CPI, which will be released this week. A drop in the core CPI could actually bring up SLV – this could revise down the FOMC’s inflation expectations. In the meantime, the recent developments in Europe may have also contributed to the weakness of SLV. Greece’s debt problem was defused, for now… One factor that could have had some indirect implications on the levels of risk in the financial markets, which may have benefited precious metals investments such as SLV, is the Greek debt problem and the possibility of a Greek exit from the European Union. The recent news from this front is that the Greeks have practically conceded to the Germans : The Greeks didn’t achieve too major goals to the austerity measures set in place. Greece received a four-month extension on its bailout. In exchange, on Monday, the Syriza-led government submitted its list of structural reforms that will need to be approved by the EU members. At least when it comes to the fiscal targets, the Greeks got a victory, and the budget surplus of 4.5% of GDP is on the table and the target could come down to 1.5% next year. These developments are likely to push away the whole Greek exit talk for the near term from the markets’ agenda. One of the main events of the week in Europe is the third tranche of the targeted LTRO. The last two auctions came short of market expectations. If this tranche also fails to reach high levels, then it could suggest the ECB may wish to expand its QE program. For SLV, lower risk in the financial markets could bring further down its price. One way is via the changes in the U.S. treasury yields. The sharp fall in U.S. long-term treasury yields at the beginning of the year changed course in recent weeks, as indicated in the chart below. Source: U.S. Department of Treasury and Bloomberg The linear correlation between SLV and U.S. long-term treasury yields isn’t strong at only -0.17 (for 7-year yields), but precious metals, especially gold, tend to have a strong relation with treasury yields. Nonetheless, the rise in U.S. interest rates, as the market expects a rise in the Fed’s cash rate in the middle of the year, could further contribute to the weakness of SLV. In the past week, the amount of silver ounces in SLV has picked up a bit albeit the silver ounces in this ETF are still down for the year. Source: iShares Silver Trust website It’s still unclear when, if at all, the FOMC starts to raise rates. For now, it seems that unless we will see a major change in the U.S. economic recovery, the FOMC will likely to raise rates in the middle of the year. Yellen’s upcoming testimony could provide some more insight about the next policy change, but I suspect this testimony, much like others in the past, won’t offer more than a general tone and “data dependency” policy. The recent diffusion of the Greek debt crisis is likely to curb down the demand for investments that are considered safe haven such as precious metals. For now, the possible upside for SLV is if the U.S. economy’s progress fails to meet market expectations (e.g. lower-than-anticipated growth in GDP or CPI). In such an event, SLV could rally, even if for a short term. For more see: Will Higher Physical Demand For Silver Drive Up SLV? Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) 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.

What Is Driving Up SLV Besides Gold?

The fall in the U.S. treasuries yields keeps up the price of SLV. The rally of gold is only partly related to the recovery of silver. Despite the recovery in silver prices, SLV’s silver holdings didn’t pick up. The silver market has started off the year on a positive note as shares of iShares Silver Trust (NYSEARCA: SLV ) added nearly 14% to their value (up to date). Is most of this recovery related to the rise in gold? Let’s reexamine the relation between silver and gold and further explore other factors that drive up SLV. Despite the progress of SLV in the past few weeks, its rally seems, at first glance, less related to the rise in gold prices. The chart below shows the linear correlation of gold and silver on a month-to-month basis (daily percent changes). Source: Bloomberg In the past month the linear correlation was around 0.615; even though this is still a significant and strong correlation, it’s also well below the levels recorded in the preceding months. Moreover, the ratio between SPDR Gold Trust (NYSEARCA: GLD ) and SLV has zigzagged with an unclear trend in recent weeks, as indicated in the chart below. Source: Google finance The ratio is still at a high level of around 7.2, which means GLD has still outperformed SLV in the past year. Some investors, however, might consider the high level of the GLD-to-SLV ratio as an indication that the latter is actually cheaper than the former. I put less faith in this assessment. This ratio could keep going up or remain at this level for a long time. After all, back in the early 90s the ratio between gold and silver started off at around 70 – this is the current ratio – and kept rising up to the low 90s and remained in the 70s and 80s range up to 1997. This doesn’t negate the fact that SLV’s recovery in the past few weeks was driven, in part, by the rise in gold. It only goes to show that other factors may have come into play in pushing up silver prices. One other factor to consider is the ongoing drop in long- and mid-term U.S. treasuries yields – they may have also contributed to the rise in SLV prices. The chart below shows the progress in the 7-year U.S. treasury yield and the price of SLV in the past several months. During the period presented below, the linear correlation between the two was around -0.3 – a mid-strong correlation. Source: Bloomberg and U.S Department of the Treasury Even though the FOMC is still expected to raise its interest rates, which are likely to bring back up the U.S. treasury yields in the second half of 2015, the recent developments in the markets including low inflation – mainly due the fall in oil prices – and higher economic uncertainty drove down U.S. treasuries yields. If yields continue to come down in the short term, this could keep pushing up the price of SLV. The recent developments in Europe including the Swiss National Bank’s decision to stop pegging its currency and ECB’s upcoming announcement of its QE program also seem to drive the demand for precious metals. In terms of growth of physical metal, this seems to play a secondary role, at best, in moving the price of silver. After all, China is one of the leading silver importers. The country recently published its fourth-quarter growth rate update; it showed a 7.4% growth in annual terms. This is slightly higher than market expectations of 7.3%. But this is still lower than its growth rate of 7.7%, which was recorded in the same quarter in 2013. This year, the World Bank estimates China’s GDP will expand by only 7.1% – this is 0.4 percentage points below its previous estimate back in June 2014. The IMF also revised down the global economic growth from 3.8% to 3.5% this year. A slower growth rate for China could suggest, at face value, a slower rise in the demand for silver. Lower growth in the world economy isn’t expected to increase the industrial demand for silver but it’s likely to drive more investors towards silver. This only serves as another indication that the demand for silver on paper leads the way for the price of SLV. But is the demand actually picking up for SLV? The chart below presents the changes in SLV’s silver holdings in the past few months. Source: SLV’s website Since the beginning of the year, silver holdings have actually slightly come down by 1.4% to 325 million ounces of silver. This could be an indication that some SLV investors have taken money off the table after the price of silver rallied. Looking forward, however, the recovery of silver is likely to slowly bring more people back to SLV. The silver market has seen a recovery in recent weeks. Over the short term, silver could keep rising especially if the global economy keeps showing slower growth. For more see: 3 Reasons to Prefer Silver Wheaton