Silver Responds to Fed, then Weakens

Silver started this week moving in a positive direction, but is now back under pressure. The metal has yet to return to its February 29 high, and it appears that many investors are deciding not to wait around.

US Federal Reserve Chairman Ben Bernanke was again a factor in the week’s silver action, but this time he had a positive effect on the market.

Falling jobless claims have been an important piece of evidence used to support confidence that the US economy is recovering. This data has also played a role in pressuring silver.

Speaking at a business conference, Bernanke put employment figures into a more sobering perspective, pointing out that nearly two years of gains have resulted in unemployment that remains well above pre-crisis levels. He also cited hours worked as being below the peak, and the current unemployment rate of 8.3 percent as being above what many economists consider to be sustainable in the long term.

Furthermore, Bernanke reiterated the Fed’s commitment to monetary policy, which is accomodative to employment. The markets, which have been desperate for a US liquidity injection, translated this as a renewed possibility for more quantitative easing.

Silver rallied during US trading, rising $1.80, and COMEX May silver managed to touch its highest level since March 20. Bernanke, however, does not receive all of the credit. Strong equities markets also appear to have been a factor.

Silver weakens mid-week

By mid-week, silver prices were back under pressure. Though the silver market reacted to Fed statements, the effects are based merely on speculation of what some people interpret certain words or omissions to mean. The lack of a clearly established position on what the Fed is going to do creates volatility more than a real direction for silver.

The market tends to quickly return to focusing on other matters, such as US data, which has been largely positive. For example, on Thursday the US Commerce Department revealed that GDP rose at an annualized rate of three percent for the fourth quarter. Silver continues to refuse to play nicely with the US dollar – when one moves up, the other tends to move down.

The European debt crisis seems to be re-emerging on the concern list for silver market participants, stealing some of the appetite for risk. China’s economic outlook also remains an issue of concern, providing an ongoing drag.

Investor sentiment

The markets appear to be increasingly losing their taste for silver. ETFs continue to be net sellers of silver, dropping 30 tonnes of the metal last week.

COMEX silver stocks, which are rising, are also a suspected cause of pressure on silver prices. The silver stocks are at their highest levels since October 2010.

Open interest in COMEX silver stopped falling last week and saw some gains, but is still well below last year’s average. Furthermore, net speculative length continued to fall, shedding another 213.6 tonnes last week.

Standard Bank said this is largely due to a hefty increase in short positions – the largest seen this year.

“The continued deterioration in long positioning, coupled with the strong pick-up in short positions, does indicate a market that expects further losses in silver,” Standard Bank added.

A reduction of positions in India’s silver futures markets was also reported last week. Market analysts blamed the reduction on speculators tracking the weak trend in overseas markets. The following of that trend has continued this week, with Multi Commodity Exchange futures contracts for May and July both down on Wednesday.

The close

May silver on the COMEX opened at $32.05 and was $32.24 at 2:40 PST. Spot silver closed up 0.22 in New York at $32.26.

The performance of silver mining equities was mixed during US trading, but appeared to be improving during afternoon Canadian trading.

Company news

United Silver (TSX:USC,OTC Pink:USCZF,FWB:UM8) commenced work on its $23 million four-year plan to further explore and develop the Crescent Silver Mine, located in the Idaho Silver Belt.

The company announced that it has begun work on the Countess spiral ramp system ahead of schedule. As this the spiral is driven down, test exploration drifting will be conducted. Ore generated will be processed, and the concentrate will be sold to Formation Metals (TSX:FCO) under an existing agreement. United Silver expects that this operation will provide cash flow to offset the cost of exploration development.

Also, while United Silver will continue to trade over the counter in the US under the symbol USCZF, the company announced it is discontinuing its relationship with OTCQX due to high costs and lack of volume.

Securities Disclosure: I, Michelle Smith, do not hold equity interests in any of the companies mentioned in this article.