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  • Spot silver prices (XAG/USD) have been firmly on the back foot on Tuesday as retail interest fizzles out.
  • Spot prices are currently testing the $27.00 level to the downside.

Spot silver prices (XAG/USD) have been firmly on the back foot on Tuesday, as the recent surge in retail interest in the precious metal fizzles out; XAG/USD prices have dropped from Asia Pacific levels around the $28.50 mark to test the $27.00 level and are down slightly nearly 7% on the day. On the week, silver’s gains have now been eroded to just 0.5%, although the precious metal is still up 7% since last Thursday.

Driving the day

Silver markets (including ETFs, futures, physical and silver mining stocks as well as spot prices) had seen significant demand in recent days as retail traders coordinating on pages such as the subreddit WallStreetBets shifted their focus from trying to force a short-squeeze in popularly shorted hedge fund stocks (such as Game Stop). An introduction of restrictions on the ability of retail investors to buy stocks such as GME and other retail darlings as retail-focused brokers struggled to hedge their risk/meet collateral requirements were cited as a reason for the shift in focus to silver markets.

However, amid the increased interest in silver, the Chicago Mercantile Exchange (CME) has increased silver futures maintenance margins by 17.8% to $16,500 per contract; “the CME move is taking some froth off the market,” said StoneX analyst Rhona O’Connell. Meanwhile, traders are also citing viral posts on WallStreetBets urging fellow traders to steer clear of the metal as a negative given these posts discourage new silver investors from getting involved and might encourage those holding profitable longs to take some risk off the table.

Meanwhile, HSBC analyst James Steel contends that another factor weighing on silver might be the fact that over the past few days, gold has not managed comparable gains; the current gold/silver ratio is “well below historical averages, and investors may recognise this level as straying too far from historical norms” he said.

Looking ahead, silver price action has of course been much more focused on the retail investment story this week and has not seemed to pay much heed to market fundamentals. But the US dollar has been firmly on the front foot amid strong US data (notably, strong ISM Manufacturing PMI on Monday) and the Dollar Index has now broken above 91.00. Should the index continue to advance in wake of further strong US data (Thursday’s ISM Services PMI and Friday’s official labour market report are the two key releases to watch), then this is likely to be a headwind for silver, given it typically negative correlation to the buck.