What Is Keeping Silver and SLV Up?

In the past month, shares of the iShares Silver Trust ETF (NYSEARCA:SLV) rose by over 7%. This comes after the price of silver came down in April. The recent fall in interest rates and the devaluation of the U.S. dollar pressured up the price of SLV. But is this rally sustainable?

The minutes of the last FOMC meeting will be released today and could offer some input about the Fed’s next move. Back in late April, the Fed omitted the forward guidance from the last meeting statement, as expected, and didn’t provide any big headlines from that short press release. Since then, however, the GDP for the first quarter was disappointing, and the NFP report wasn’t too impressive – we didn’t see any big move in wages even though growth in jobs picked up.

The Federal Reserve’s two mandates are the labor market and inflation. This week, the CPI monthly update will be released, but it’s less likely to show any big gains in the core CPI, which is still expected to remain below 2% – lower than the inflation target of the FOMC. For the labor market, the growth in jobs has slowed down and wages aren’t picking up. The labor market is doing much better than in previous years, and the Fed shouldn’t be too concerned about it.

Considering inflation is still low, the labor market’s progress may have slowed down and wages are still at a 2% growth pace, should the Fed pull the rate hike trigger? For now, the market factors in these issues. This is plausibly why the implied probability of a September rate gain is only 23%; the odds of the hike in December are 57%. These aren’t too impressive odds. As long as the market thinks the Fed will push forward its rate hike, silver is likely to benefit from it. Nonetheless, the minutes of the FOMC could move the current market expectations for an earlier rate hike if they show a more hawkish Fed.

Yields and U.S. dollar

Since the expectations for a rate hike have subsided, long-term yields have started to come down again in the past few days – plausibility contributing to the recent recovery in the price of SLV. The chart below presents the movement of the 7-year treasury yield and the price of SLV during the past few months:

Source of data: Bloomberg and U.S. Department of the Treasury

As you can see, the price of SLV is partly correlated to the movement of long-term yields. The recent fall in yields came after a sharp rise back in April. Silver also came down last month and rallied in the past few days.

This could suggest if interest rates were to start rising again, the price of silver will suffer in the process. Keep in mind, interest rates are still very low, especially in Europe, but also in the U.S. For a stronger recovery in the price of SLV, interest rates will have to bounce back and reach much higher levels from where they are now.

Besides falling yields, the progress of the U.S. dollar is another factor to consider when examining the movement of SLV. In recent weeks, the U.S. dollar has also done poorly and has devalued against currencies including the euro and Japanese yen. The linear correlations among the leading currency pairs and the price of SLV are still strong especially with yen/USD. This strong correlation with yen/USD is because this currency pair is mostly driven by the changes in the U.S. economy and is a bit less volatile than other important foreign exchanges.

Source of data: Bloomberg

Demand for silver as investment

Despite the modest gain in the price of silver, the demand for the silver ETF hasn’t increased.

Source of data taken from SLV’s website

Silver holdings of the SLV ETF have gone down in recent weeks. This isn’t a solid indication for the market’s faith in the latest rally of silver. At face value, this indicates the demand for silver as an investment, at least via the SLV ETF, hasn’t picked up.

The silver market is still stuck. The recent rally isn’t enough to suggest silver is making a comeback. If interest rates were to change course again and start rising and if the U.S. dollar doesn’t further depreciate, the price of silver could change course again and resume its descent. Source: