Today we're looking at how behavior leading up to and right after the Sept. 17 Fed decision has shaped our new silver price forecast. (Also check out our post-Fed gold price forecast.)
Silver tends to mirror gold's price movements, both up and down - but with leverage.
However, there's another factor most are underestimating in relation to silver prices. And although the Fed omitted any mention of it last Thursday, I believe it was central to their decision on interest rates.
It's like "rocket fuel" for precious metals - especially silver. Take a look...
Silver Price Struggles to End Cyclical Bear
Much like gold, silver prices started out the year strong, rallying from about $15.75 to $18.50. Here too, many investors hoped the cyclical silver bear that started in April 2011 was finally ending.
But by mid-March, silver had already corrected back to $15.50, erasing all those gains and even giving some back.
From there, silver moved sideways before selling off in mid-June. Silver prices touched a low of $14.11 by late August, when markets swiftly corrected.
That had the hallmarks of a capitulation, because it was a quick drop from $15.50 to $14.11. But silver recovered more than the market, and two weeks later had a small retest that brought it only to the $14.40 level. That appears to be a classic higher low.
Along with gold, this action just might have cemented the end of silver's nearly four-and-a-half-year correction.
Let's now look at the price action in silver and silver stocks in the week leading up to the Fed rate decision...
Silver Stocks Rally Ahead of Fed News
The Global X Silver Miners ETF (NYSE Arca: SIL) is a good proxy for the world's largest silver miners and royalty companies.
Much like GDX, the gold miners and royalty ETF, SIL touched its lowest level ever, $6.04, intraday on Sept. 11. And yet strong buying came in and helped reverse the trend for SIL to close up at $6.33 for that day, 4.8% higher than that day's low.
Now let's compare what the SPDR S&P 500 ETF (NYSE Arca: SPY), silver, and silver stocks did in the trading week leading up to the Sept. 17 Fed decision.
Then we'll discuss the one overlooked factor that will send silver prices higher...
The above chart displays SPY's gain of some 2% in the week before the Fed's announcement. By comparison, silver was up about 4%, doubling gold's 2% gain by Sept. 16.
Silver stocks, represented by SIL, were up a stunning 7% before the Fed news.
Looking more closely at the announcement day is even more impressive.
Here you see that the moment the Fed rate announcement came at 2 p.m., silver shot up 1%. And as Fed Chairwoman Janet Yellen spoke at the press conference, silver continued to climb higher, gaining another 0.5% by 3 p.m. over the pre-2 p.m. level.
The action in silver stocks was even more pronounced.
SIL began to climb swiftly about 10 minutes before the Fed's announcement, dropped slightly afterward, climbed again as Yellen spoke at 2:30 p.m. to gain about 3.5% on the day by 3 p.m., then settled with a 3% gain by the end of trading.
Here's how the action in silver stocks looks over the past six months.
The recent double-bottom formation and the pop above SIL's 50-day moving average of $6.85 are very encouraging for silver equities. If we can get a close above $7.50 in SIL, and hold that level, we could be off to the races.
Much like gold and gold stocks, silver and silver stocks appear to have anticipated no rate hike from the Fed at the latest meeting.
On the morning of Sept. 18, the day after the Fed announcement, markets began digesting the news and decided they didn't like it. The S&P shed 27 points, or 1.35%, by about 2 p.m.
But I think one of the most overlooked factors that helped determine the Fed's decision was dollar strength. Here's what it means for silver prices...
How the U.S. Dollar Affects the Silver Price Forecast
In the last year, the U.S. Dollar Index has gained a massive 25%, correcting since mid-March for an 18.7% gain so far.
That put tremendous pressure on the Fed to not raise rates, which would have supported the dollar even further. The strong greenback has been a headwind not only for U.S. multinationals and exporters, but also for commodities, which are priced in dollars.
That's been a thorn in the Fed's side, which Yellen mentioned in passing but downplayed while responding to a press conference question.
Not raising rates helped weaken the dollar, since so much expectation for a rate hike had already been priced in. The dollar has been unable to rise above the 98 level since early August. On Sept. 17, the day of the Fed's rate announcement, it closed at 94.68, below its 200-day moving average for the first time in over a year.
That was like rocket fuel for precious metals, and silver in particular.
If the dollar continues to weaken, it will drive precious metals prices even higher.
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Gold Prices Ready to Rise Again... After four years of correcting and forming a double bottom around the $1,100 mark, gold seems ready to resume its long-term secular bull market. Just take a look at these charts...