Silver Prices Continue To Decline As ECB Weighs Cutting Quantitative Easing

Tuesday, October 4, 2016

fine silver

Silver has been one of my favorite assets to follow throughout the year 2016. During most of the year, we saw strong gains. However, more recently as economic conditions improve, the white metal has suffered declines in demand and a slow, yet relatively steady decline in the price of silver. Now, we're seeing more declines as speculation with regard to a coming ECB decision flies around the web. Today, we'll talk about the speculation, what it has to do with the price of silver, and what I'm expecting to see from the commodity ahead.

ECB May Taper Off Quantitative Easing

As mentioned above, one of the big stories precious metals investors are watching closely at the moment surrounds the ECB. For some time now, the European Central Bank has been playing a policy from the Federal Reserve's playbook called Quantitative Easing. The way this works is the central bank creates more money and purchases bonds with it. As a result, bond rates drop, leading to further investing in corporations as well as easing lending conditions.

However, at this point bond rates in Europe are worrisome to say the least. Because of excessive Quantitative Easing, long-term yields and short-term yields are getting closer and closer together. As a result, long-term loans don't quite generate the profit that they did in the past, which could create an economic problem on its own.

As a result, the European Central Bank is expected to either end Quantitative Easing all together... which I believe is highly unlikely. Or, the central bank will start to taper off Quantitative Easing, taking a slow and steady approach to finding a solution to the problem. Given the ECB's history, the latter is more than likely the case.

What Does This Have To Do With The Price Of Silver?

While it may seem as though the ECB's decision with regard to Quantitative Easing and silver are completely separate topics, the truth is that they are actually closely related. This is the result of the fact that silver is largely looked at as a safe haven investment, combined with the fact that bonds are looked at in the same light.

The low returns on long-term bonds have been a great thing when considering the prices of precious metals. With such low yields, investors who weren't interested in risking their money in the market saw little value in the safe properties of bonds. So, they started to look to other safe investments with stronger yield potential. Precious metals like gold and silver fit the bill. However, if the ECB stops the Quantitative Easing process, bonds will likely start to take more of a share in safe haven demand, putting pressure on precious metals.

What We Can Expect To See Moving Forward

I have a relatively mixed opinion of what we can expect to see from silver. While my long-term opinion on the precious metal remains bullish, the short-term outlook seems to be becoming grimmer. As the threat of increased interest rates from the Federal Reserve persists, the ECB tapers off QE, and economic conditions around the world seem to be improving, we're likely to see declines. However, there are still questions with regard to the global economy that only the most entrenched experts seem to be discussing. These threats are likely to cause continued volatility in global economic conditions, helping to provide support for further long run growth in the price of silver.

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.