Fed’s Position on QE Crushes Silver

A Purchasing Managers’ Index (PMI) compiled by HSBC and Markit Economics and released in March showed contraction in the Chinese economy and derailed the positive track that silver was on that week. The official PMI was due to be released Sunday night and was again expected to carry weight in the market.

This time, the PMI placed the nation in expansion territory, which is indicated by a figure above 50. According to China’s National Bureau of Statistics, the nation’s PMI rose to 53.1 from 51.

Though the markets were reminded that there is a pattern of China’s PMI rising in March, silver investors responded positively to the news, and the data gave the market a boost, with the metal going 78 cents above last Friday’s closing price.

Chinese investors provided no direction by way of their response to this data as their markets were closed until Thursday for holidays.

This boost followed the good day silver had ahead of the weekend. At times on Friday the white metal outperformed gold. By Tuesday, CME Group reported that though the silver market was off balance, overnight some bullish analysts were forecasting the potential for an upside of as much as $3 or $4 in silver prices.

Fed crushes silver

The silver market largely disregarded positive data regarding US factory orders. Tuesday was a day with something much larger on the agenda: the release of the Federal Open Market Committee (FOMC) minutes.

Throughout the first quarter, the market revealed its obsession with US monetary policy by digging into Federal Reserve statements for indications of the likelihood of quantitative easing (QE). When the FOMC minutes were released, the silver market, which had gained on what appeared to be positive indications last week, was severely disappointed when the Fed distanced itself from the likelihood of more QE.

Notable from the minutes was an excerpt that said: “[a] couple of members indicated that the initiation of additional stimulus could be necessary if the economy lost momentum or if inflation seemed likely to remain below its mandate-consistent rate of 2 percent over the medium run.”

While the use of QE or similar measures might be possible in the future, members agreed that the current economic outlook does not warrant more such policy.

This news sent silver into a downward spiral that continued Wednesday. Falling more than five percent, COMEX May silver slid past its March low and closed the day at the lowest level since mid-January.

EU keeps the pressure on

On Thursday silver put up a fight for recovery even in the face of a strong dollar. However, the market not only needs to overcome disappointment from the Fed, but also re-emerging concerns about the EU, which have been on the radar since the beginning of the week and are expected to intensify.

The markets did not ignore the fact that Spain’s bond auction, which follows its recently unveiled austerity budget, was characterized by weak demand and rising yields. It was also of concern that Italy’s borrowing costs rose this week. Leaders in the Eurozone aren’t adding optimism.

Spain’s Prime Minister, Mariano Rajoy, reportedly said Spain’s economy is in “extreme difficulty.”

ECB President Mario Draghi is also quoted as saying the economic outlook remains subject to “downside risks.”

Observations of skepticism in the silver market were further supported by the latest Commodity Futures Trading Commission report, which revealed that as COMEX players unwound 350 tons of long positions, they increased short positions by 179 tons. Standard Bank reports this as the largest increase so far this year.

Although US markets are closed Friday in observance of holiday, the US jobs report due out that day is one the silver market is expected to be on the lookout for.

The close

The COMEX May silver contract closed near session highs on Thursday, but there is still work to be done for silver to regain ground. New York spot prices closed on April 4 at $31.36 and were up to $31.74 on Thursday.

Silver stocks were mostly in the red throughout the US session and through midday Canadian trading.

Company news

First Majestic Silver (TSX:FR) has agreed to purchase Silvermex Resources (TSX:SLX).

Under the agreement, First Majestic agrees to acquire all issued and outstanding shares of Silvermex for 0.0355 common shares of First Majestic Silver and C$0.0001 in cash per common share of Silvermex, which values Silvermex at approximately C$0.60 per share.

This deal will provide First Majestic Silver with a fourth producing asset and further growth potential in its Mexican portfolio. The acquisition is also said to provide Silvermex shareholders with a highly attractive premium to the current market price.

Securities Disclosure: I, Michelle Smith hold no equity interest in the companies mentioned in this article.