Will the U.S. Jobs Report Reverse the Bear Market in Silver?

While the Dow Jones Industrial Average continues to flirt with all-time highs, silver entered bear market territory last week, having fallen by over 20% in the last six months; the iShares Silver Trust is down 22.2% since Oct. 4 against the Dow, which is up roughly 11%. Friday's non-farm payroll report showed that the economy added just 88,000 jobs last month relative to the 200,000 that were expected. The weak U.S. jobs report suggests that the economy may not be on as solid footing as the stock market would suggest. While there are alternate explanations for the action of the various financial markets, the weakness of the labor market is not likely to reverse the slide in silver without some help.

^DJA Chart

^DJA data by YCharts


The U.S. jobs report
Friday's jobs report was significantly weaker than expected, providing some evidence that the economy is not as strong as the equity market suggests. While the unemployment rate ticked slightly lower to 7.6%, this was largely driven by individuals leaving the labor market, not increased employment. Retail was the hardest hit sector, having cut jobs despite apparently improving retail sales figures over the last two months.

Of note is the fact that this is the first jobs report since the sequestration cuts took effect. While there is no direct evidence that the cuts are responsible for the weaker than expected numbers, the connection is likely, and has a psychological impact at least. Employers may have been reluctant to add jobs until the future becomes better defined.

Alternate explanations
Douglas C. Lane & Associate's Sarat Sethi explains that hedge funds and institutional investors employed significant leverage to maximize exposure while prices were climbing, largely as a speculative response to the Federal Reserve's insistence on quantitative easing. The combination of the European debt crisis with other central banks mirroring the Fed's policies has led to strength in the dollar and weakness in commodities. As large positions are unwound, and outstanding leverage shrinks, the effect is to take down commodity prices more quickly than would otherwise be expected. Under this view of the market, the run up in stocks need not be a divergence from the evidence offered by the rest of the market regarding the strength of the economy.

The view for silver
If you reject that somewhat convenient explanation, the near-term outlook for silver remains unclear. Even if large institutional investors are liquidating silver positions, there can be little doubt that the stock market is being propped up by the Fed. Silver miners like Pan American Silver and First Majestic have each reported strong production numbers, but have seen their stocks hammered. This is partly explained by soaring operating costs and environmental concerns, but weak economic conditions shed some light on why miners have significantly underperformed the commodity.

Ultimately, I believe that silver should bottom out and that the real weakness in the economy should allow silver to reverse soon. The U.S. labor market is showing real weakness; the Congressional Budget Office estimates that unless action is taken the sequestration cuts will cost the economy 750,000 workers this year. If this occurs, it is hard to imagine precious metals not rising.

If you are looking for another company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.

The article Will the U.S. Jobs Report Reverse the Bear Market in Silver? originally appeared on Fool.com.

Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Goal Setting

Want to succeed? Then you need goals!

View Course »

Investing in Emerging Markets

Learn to invest in a globalized world.

View Course »

Add a Comment

*0 / 3000 Character Maximum

1 Comment

Filter by:
bkenwo2140

0 I cant wait.

April 09 2013 at 8:22 AM Report abuse rate up rate down Reply