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  • Spot silver has been firmly on the back foot in recent trade, dropping under the 200DMA and towards $24.00.
  • Rising US government bond yields and a stronger US dollar are weighing on precious metals markets.

Spot silver (XAG/USD) prices have slumped in recent trade, with the precious metals losing its grip on the 200-day moving average (which currently resides at $24.71) and dropping sharply towards the $24.00 level. At present, XAU/USD trades with steep losses of about 2.5% or roughly 60 cents on the day. A test of annual lows at $24.01 seems imminent and a break below this level would open the door, technically speaking, to a move back towards Q4 2020 lows around $22.00.

Driving the day

A sharp rise in US government bond yields on Tuesday, seemingly in anticipation of US President Joe Biden’s infrastructure bill announcement on Wednesday, is putting precious metal markets under pressure. Real and nominal yields are up; nominal 10-year yields hit fresh post-pandemic highs at 1.77% on Tuesday but has since pulled back to under 1.75%, while 10-year TIPS yields (the inflation expectation adjusted yield on the 10-year bond) is up closer to 9bps and now trading around -0.60%. As a reminder, precious metals are negatively correlated to real yields.

Elsewhere, and not helping dollar-priced precious metals like XAG/USD and XAU/USD, the US dollar is trading firmly on the front foot on Tuesday; the Dollar Index (DXY) surged above 93.00 at the start of European trade and has since picked all the way to the 93.30s (a rally of nearly 40 points on the day). The rally in yields is helping and so too is the build-up in expectations that Biden’s infrastructure spending packages will boost US economic growth in the coming years, with hawkish implications (relative to other major central banks anyway) for Fed policy and US interest rates.

Looking ahead, one risk to the US economic outlook in the short-term is if the recent rise in Covid-19 cases in the country turns into something worse like has happened in Europe over the past months and results in lockdown restrictions in some states being brought back in. This could potentially dent growth expectations for 2021, but the hope is that any third wave of Covid-19 cases in the US will not be too bad, given that most of the country’s more vulnerable population are now vaccinated. Either way, growth expectation setbacks could cause yields to drop a little and this is unlikely to be good for USD, though in fairness, the USD might derive some safe-haven demand which could reduce any potential losses.

Either way, a third wave would likely be good for silver (and gold). But given that 1) this scenario still seems an unlikely prospect, 2) the US data is likely to show continued recovery, 3) the vaccine rollout is likely to continue going well and 4) infrastructure stimulus spending hopes are likely to continue to rise, risks for USD and US bond yields both seem tilted to the upside.