As is often the case with Federal Reserve meetings, this week’s Fed meeting was expected to have some impact on precious metals and the related exchange traded funds, including the iShares Silver Trust (NYSEArca: SLV) and ETFS Physical Silver Shares (NYSEArca: SIVR).
What potentially stands in the way of upside for silver ETFs is not that the Fed decided to raise rates this month. That was widely expected heading into this meeting. The issue for precious metals ETFs is the specter of a quicker pace of rate hikes in 2018. That could buoy the dollar and weigh dollar-denominated commodities.
“Per the latest Commitment of Traders (CoT) data, large speculators reduced their net long exposure on silver by nearly 28,000 contracts last week — the biggest decline ever recorded. There have been just seven weekly declines of more than 20,000 positions ever, according to Schaeffer’s Quantitative Analyst Chris Prybal. The two-week drop of 36,150 contracts is the second-largest ever, exceeded only by a signal in May 2017,” reports Schaeffer’s Investment Research.
SLV and SIVR, which are backed by physical silver bullion, have traded slightly lower since the start of the fourth quarter and year-to-date performances for the silver ETFs are well behind competing gold funds.
Related: Gold ETFs May Still Have Opportunities to Shine
However, some commodities market observers believe silver can rebound in the near-term. The rebounding U.S. dollar is hurting silver. The PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP), the tracking exchange traded fund for the U.S. Dollar Index, is one of the worst-performing currency exchange traded funds this year. UUP is lower by almost 8% year-to-date. Silver and other commodities are denominated in U.S. dollars, meaning weaker greenback is often supportive of upside for commodities prices. The dollar has recently traded slightly higher, weighing on some commodities.
Silver could get another boost if gold prices start rebounding in earnest. Indian demand is vital for gold because the country is the second-largest buyer of the yellow metal behind China. India, one of the world’s largest gold consumers, could be set to lower its import tax on bullion, which could be major catalyst for gold prices.
“If past is prologue, the silver ETF could be in for even rougher waters in the near term, should the Fed hike rates as expected today,” notes Schaeffer’s. “The central bank has lifted interest rates four times since 2015, and the SLV ETF has averaged near-term losses afterwards. Specifically, SLV was down an average of 1.38% a week after rate hikes, and down 0.14% one month later, per Schaeffer’s Senior Quantitative Analyst Rocky White. That’s compared to average anytime gains since 2015.”
For more information on the silver market, visit our silver category.