Silver Price Analysis: XAG/USD stabilises below $27.00 level as retail froth subsides

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  • Spot silver (XAG/USD) prices have stabilised just to the south of the $27.00 level on Wednesday as retail froth subsides.
  • A stronger US dollar is posing some problems for the precious metal.

Spot silver (XAG/USD) prices have stabilised just to the south of the $27.00 level on Wednesday, a modest recovery after dropping below the $26.50 mark on Tuesday. A recovery in the market’s appetite for risk is likely helping and it appears as though speculative froth with regards to retail investor demand is dying down, although the US Mint did announce on Tuesday that it cannot meet the rising demand for the precious metals as plant capacity issues poses problems. However, a stronger US dollar is posing some problems for the precious metal.

Driving the day

Wednesday is shaping up to be another favourable one for risk appetite; US equity markets opened mostly higher and stocks in Europe have been doing well, while crude oil markets and industrial metals alike are performing well; sentiment remains buoyant in anticipation of more US fiscal stimulus (an advisor to US President Joe Biden suggested Congress could pass a $1.3T bill) and amid continued positive news flow on the vaccine front.

FX markets are unreflective of the upbeat tone, however, posing a problem for precious metal market. While NZD and AUD take the top two spots in the G10 FX performance table on Wednesday, a reflection of bullish macro events down under, the US dollar is the next best performing currency on the day and the Dollar Index (DXY) has rallied from Asia Pacific session lows around the 91.00 level to set fresh two-month highs in recent trade of just above the 91.30 mark. Typically, a stronger US dollar weighed on precious metals such as silver, which have a negative correlation to it.

In terms of why the US dollar, typically seen as a safe haven asset, is gaining for a third straight day; investors/market analysts do seem somewhat confused and many are chalking the move up to a “long-overdue” technical correction to the upside in order to allow a market that has for some time been heavily short the US dollar (according to CFTC speculator positioning data). Lots of focus is also being given to this week’s heavy schedule of US data. ISM services PMI numbers for January are due any minute and stronger than expected reading could further boost the US buck at the expense of the likes of silver.

 

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