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  • Spot silver prices continue to consolidate around the $27.00 level amid conflicting forces.
  • A rising USD and higher real yields are bearish but rising inflation expectations are bullish.

Spot silver prices (XAG/USD) continues to consolidate just above the $27.00 level as the conflicting forces of higher real US yields and a stronger US dollar versus rising inflation expectations keeps investors on the fence. So far on Thursday, $26.90 has acted as a floor for the price action, while the early Thursday Asia session/early Thursday European session highs of just under $27.40 have acted as a ceiling. At present, silver’s spot market price is close to the $27.00 level, down about 30 cents or 1.1% on the day.

The precious metal was broadly unreactive (as was the US dollar) to recently released weekly US jobs numbers and November trade data; the former was better than expected, with Initial Jobless Claims in the week ending on 2 January 2021 remaining largely unchanged at 787K versus expectations for a rise to 833K from 790K (revised up from 787K) the week prior.

Meanwhile, November US trade numbers showed a record trade deficit of $68.1B, a little more than expectations for a trade deficit of $65.2B. Most expected that significant additional borrowing under a Democrat-controlled White House and Congress will further widen the US trade deficit, as Americans continue to borrow from the rest of the world.

Conflicting forces buffet precious metal markets

USD has seen further recovery on Thursday, moving above Wednesday’s 89.80 highs to set new weekly highs in the 89.90s. Markets remain largely indecisive regarding the potential long-term impact that a Democrat-controlled Congress to go along the Biden administration’s takeover of proceedings at the White House will have on the US dollar. The main bullish arguments go along the lines of further fiscal stimulus boosting US growth in 2021 and beyond leading to higher inflation and a more hawkish Fed, while the major bearish arguments are along the lines of more fiscal stimulus leading to higher government and trade deficits and rising bond yields, which put more pressure on the Fed to print money to keep government borrowing costs low.

Either way, what happens in the long term to USD will be crucial for precious metal markets, which tend to have a strong negative correlation to the greenback. Upside in the US dollar on Thursday is one factor weighing on spot silver.

Another factor are rising US real yields; the US 10-year TIPS yield is trading in the -1.03%s, a decent rise from Monday’s record lows at -1.113%. Rising real yields reduces the incentive to hold non-yielding precious metals over negative-yielding US debt.

Nominal US bond yields are rising by an even greater margin; the US 10-year is up 3.4bps on the day to trade at +1.076%, its highest levels since February 2020. However, the fact that the rise in nominal yields is larger than the rise in real yields is actually a positive for precious metals as it means that inflation expectations have risen; 10-year break-even inflation expectations have risen above 2.07% from 2.04% on Wednesday (implying that traders expect CPI to average 2.07% over the coming 10-year period).

Of course, precious metals are seen as the ultimate hedge against inflation, so as long as inflation expectations continue to rise, this ought to cushion any further precious metal downside as a result of a rising USD and real yields.