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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? Scalper1 News
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