The silver price this week has been particularly disappointing, trading at its 2014 low for the last six trading days.
As of yesterday's (Thursday) close, the bid price for spot silver was $18.52 an ounce, down $0.09 on the week. Silver is also down 4.8% on the month, and for the first time is trading 5% down on the year.
Similarly, silver futures for December delivery are down $0.09 on the week to $18.52 as of yesterday's close. They have also fallen nearly a dollar on the year, or 5.1%, and about 5% on the month.
Other silver investments were hit as well.
Exchange-traded funds backed by physical silver bullion closed at 52-week lows. The iShares Silver Trust (NYSE Arca: SLV), the largest silver ETF, closed yesterday at $17.77, down $0.12 on the week and down 5.3% on the month. The ETFS Physical Silver (NYSE Arca: SIVR) was down $0.16 on the week, and 5.2% in 2014.
But the bad news for the silver price is tempered by bullish indicators that could spark a rally in the near-term and carry it up to the end of the year.
But first, what moved silver down this past week...
Silver Price Taking Cues from U.S. Federal Reserve
At week's opening, silver was making slight gains, pushing forward about $0.08 before Wednesday's U.S. Federal Reserve Federal Open Market Committee (FOMC) meeting erased all those gains and then some.
Silver lost 0.9% on the day, or $0.165. On average in 2014, silver prices drop a marginal $0.03 after FOMC meetings, though since the last two Fed meetings, silver has gained an average of $0.10.
In this recent Fed meeting, nothing particularly surprising happened. The Fed tapered its two-year bond buying program another $10 billion, and signaled that next month it is likely to put an official end to the program.
Fed observers have been looking carefully at any language that could reveal a more explicit timeline as to when the Fed will begin to offload its balance sheet and put upward pressure on interest rates.
But Fed Chairwoman Janet Yellen has been offering the same vague guidance after every meeting, declaring that when the bond-buying does end, it will be a "considerable time" before interest rates spike.
The markets have been watching closely for Yellen to drop the "considerable time" phrase, and there may be more clarity next month when the bond-buying program is expected to come to its official end.
The silver price most likely moved on more hawkish indicators that came out of the meeting, suggesting that the Fed would in the near future back away from the inflation-friendly policies it has been pursuing since the financial crisis started.
"There is a clear shift within the FOMC towards a less dovish stance with regard to the current state of the labor market, with regard to asset prices and with regard to the outlook for interest rates, evidenced by the comments of those voting against the decision; by those expecting a rate rise next year and; by the calculated median outright interest rate by the end of 2015," said Atul Lele, chief investment officer of Deltec International Group, according to Marketwatch.
Two notable changes did signal more hawkish sentiment from the Fed.
One of which was the shift in interest rate expectations from the FOMC members from the July meeting. After a survey of FOMC members expectations in July for 2015 rates, the average stood at 1.875%, and in this most recent meeting, the average came to 2.7%.
Additionally, this FOMC meeting brought dissent to the mix of FOMC participants who are largely endorsing a dovish monetary policy.
Whereas after the last meeting, it was only Federal Reserve Bank of Philadelphia President Charles Plosser who objected to the Fed's policy recommendations, stating that he objected to the phrase "considerable time," this meeting saw another defector in Federal Reserve Bank of Dallas President Richard Fisher.
Fisher believed "that the continued strengthening of the real economy, improved outlook for labor utilization and for general price stability, and continued signs of financial market excess, will likely warrant an earlier reduction in monetary accommodation."
Silver and other precious metals tend to get price bumps when investors fear inflation, as it is considered hedge against eroding dollars. With the Fed looking to back away from its monetary stimulus regiment, investors seem to be backing off on the Feds words.
But inflation or not, one particular indicator seems to indicate a silver price rally in the near term...
Silver Futures Market Holds Key to Next Price Rally
Silver is once again fighting against growing short positions - paper bets on future price declines that grow in value as silver prices fall - on the futures markets. On July 29, shorts were at their lowest levels since Feb. 2013, totaling 12,603 contracts.
The accompanying chart shows just how sensitive silver prices are to speculator shorts. As they build, prices decline, but a peak in short positions signals a coming rally.
At this low level of short contracts, silver was open to attack by the short sellers. For the last six weeks, this figure has swelled to 41,667 and prices have declined on this bearish trading activity.
With shorts this high and prices this low, short sellers are going to be feeling pressure soon.
It's going to be hard for silver to trade this low without attracting some investor interest, and as soon as the shorts see long buyers enter the market, they too will begin buying long to cover their shorts and silver prices will flourish.
Short contracts on silver have been growing at a pace of about 5,000 contracts a week since the late July low. At this pace, if silver short contracts don't eclipse their peak in early June of almost 49,000 shorts, you can expect this short liquidation and subsequent silver rally to kick in within the next two weeks.
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