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  • Spot silver prices are consolidating just above the $25.00 level ahead of key events later in the week.
  • XAG/USD is back from Asia Pacific session highs of just under $26.00 amid a stronger dollar and higher yields.

Spot silver (XAG/USD) prices are currently consolidating within last Friday’s ranges just above the $25.00 level, with prices having now completely handed back Monday’s Asia Pacific session gains that saw XAG/USD nearly rallying all the way back to the $26.00 level. At present, the precious metal trades flat on the day and will likely continue to do so for the rest of the session given a lack of pertinent incoming economic or macro-related risk events.

Driving the day

Spot silver prices started Monday trade on the front foot as a result of a combination of modest US dollar weakness and likely also a bit of profit-taking by those holding shorts positions over the past week or so (over which time XAG/USD has relentlessly dropped). But traders clearly saw the move back to $26.00 as an opportunity to sell the rally and this made sense in the context of the US dollar’s swift recovery from early Asia Pacific session lows and a pickup in US government bond yields.

In terms of the latter; 10-year yields are roughly 3bps higher on Monday and currently around 1.58%, having at one point been back above the 1.60% level. This is being touted as boosting the dollar, with the Dollar Index (DXY) having risen from 91.80 lows to current levels in the 92.20s. Whilst the combination of higher yields and a stronger dollar have pulled silver back from highs, the fact that real yields are flat (the 10-year TIPS yield is going sideways around -0.65%) seems to be saving precious metals such as silver from sliding into a deeper sell-off.

As a reminder, precious metals are negatively correlated to real yields. Meanwhile, higher nominal yields but flat real yields imply higher inflation expectations and 10-year break-evens are back at their highest levels since 2014 at above 2.23%. The fact that precious metals are seen as a hedge against inflation means that this is also likely cushioning what could otherwise be much worse losses.

Sticking with the theme of higher inflation expectations; US President Joe Biden’s $1.9T “rescue” package passed the Senate over the weekend via the process of budget reconciliation (i.e. meaning not one single Republican vote was needed). Various amendments will now be voted on but, at this point, it looks almost certain that Congress will ratify the package within the next week or so. Various market commentators commented over the weekend that the passage of the bill has triggered “inflation fears”. However, if this was the case, precious metals like silver ought arguably to be doing much better.

Looking ahead, the key drivers for silver this week will be the factors affecting the US dollar and US bond yields, meaning attention will be on Wednesday’s Consumer Price Inflation data release for February and 10-year government bond auction. If the former is stronger than expected and the latter shows poorer than expected demand for US government debt, this would provide fresh impetus to the recent move higher in bond yields and would likely be USD bullish and precious metal bearish. US Weekly Jobless Claims on Thursday and Producer Price Inflation and Michigan Consumer Sentiment on Friday will both also be in the spotlight, as will central bank meetings like the ECB (on Thursday) and BoC (on Wednesday).