Silver spot price down 4% as market remembers tapering

San Francisco (Dec 12)   The spot price of silver has fallen more than four percent today, to as low as 19.447, completely erasing its gains from the start of the week as the market seemingly remembered the looming prospect of tapering. The major fundamental trigger though was an unexpectedly strong US Retail Sales report for November.

Month-on-month headline retail sales rose 0.7 percent last month, exceeding the market consensus for a rise of 0.6 percent. As well, the prior month’s reading was upgraded significantly, to 0.6 percent from the flash estimate of 0.4 percent.

The bearishly-skewed forecasts range, from 0.2 percent to 1.4 percent, signalled that the majority of analysts had expected a rebound in consumer spending after the US government shutdown in October. In fact, spot silver actually started its downtick in today’s European session, seemingly anticipating an upside surprise that would bolster the greenback and beat up risk assets.

The Retail Sales report “points to upside risk for consumer spending in Q4 and thus, GDP”, warns Jenifer Lee, a senior economist at the Bank of Montreal. Lee notes that the positive contribution to the evidence of US economic recovery “will add to speculation about the Fed’s decision next week on tapering”.  

Meanwhile, US Unemployment Insurance Initial Claims for last week checked in at 368,000, disappointing expectations for a more modest increase of 21,000 to 321,000. Deutsche Bank chief US economist Joseph LaVorgna believes that the “jump in jobless claims is due to seasonal distortions”, an observation also made by the Labor Department, and expects claims next week “to fall back toward the 4-week moving average of 329,000”.

In today’s New York trading so far, the US Dollar Index has risen to a two-day high at 80.16, bolstered by mounting speculation of stimulus taper starting as from next week’s FOMC meeting.

Chartists at Bank of America Merrill Lynch continue to see the recent weakness in the USDX as both corrective and temporary, before resumption of the larger uptrend “for a move towards 82.33/82.67 and ultimately beyond”. “An impulsive break of 80.23 would confirm that the upturn has resumed”, BofA believes. The US bank thinks that only a break of the 78.99 support would invalidate its bullish view.

If the US Dollar Index has indeed based out, risk assets like silver and gold may face further headwinds due to their historical negative correlation with the greenback.