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  • Risk-off and a stronger US dollar has seen spot silver prices trade on the back foot.
  • XAG/USD has dropped back below the $25.00 level.
  • However, falling real yields and rising inflations signal that perhaps Friday’s sell-off is a little over-the-top.

Spot silver prices (XAG/USD) have been firmly on the back foot in recent trade amid what has thus far been a broadly risk-off feel to trade on Friday, especially in FX markets, where haven USD, CHF and JPY lead the G10 performance table and risk-sensitive currencies AUD, NZD and CAD are the laggards. XAG/USD is down around 2.5% on the day and trading below the $25.00 level, but is off worst levels from when the metal slipped as low as $24.64 where it was down more than 3% on the day.

The stronger US dollar as a result of the risk-off feel to trade seems to be broadly weighing on precious metals markets, though silver’s woes appear worsened by what looks to have been a bout of technical selling; traders identified an uptrend linking the Monday, Thursday and Friday lows. Spot silver’s 50-day moving average, which resides at $24.90 looks to have come into play as support.

Risk appetite weighs on silver

A combination of factors appear behind the market’s sour mood on Friday;

1) Markets appear to have had a “sell the fact” reaction to the announcement of US President-elect Joe Biden’s stimulus plan announcement (he announced a $1.9T package including a $1400 top-up stimulus cheque for each American).

2) The US has taken further action against Chinese companies, with the Pentagon blacklisting nine companies to its list of firms it considers associated with the Chinese military

3) Lockdown news has been bad, with German Chancellor Angela Merkel now reportedly mulling a much tighter lockdown, Italy to tighten restrictions, while Pfizer is temporarily reducing its deliveries of the vaccine across Europe in order to upgrade its production capacity.

4) US retail sales numbers for December were bad, with declines seen in headline, core and control group sales. This comes off the back of poor weekly jobless claims numbers for the week ending 9 January that was released yesterday, showing a steep rise in initial claims.

All of this has helped to drive stocks lower in Europe and the US and to drive flows into safe-haven currencies such as USD, CHF and JPY. With the market having been so short US dollar in recent months and many institutions calling for a period of consolidation rather than an immediate continuation of USD weakness, many traders might be seeing this as a nice time to book profit on long-term USD shorts. Strength in the US dollar is weighing broadly on industrial and precious metals as well as energy markets.

The dovish tone to Jerome Powell’s comments on Thursday, in which he pushed back against the notion that the Fed will be looking to taper the rate of monthly asset purchases any time soon seems a distant memory at this point and are not offering markets, or indeed USD bears much solace.

But underlying fundamentals don’t warrant sell-off

Looking at the usual drivers of significant precious metal price action, Friday’s relatively steep sell-off in spot silver appears somewhat overdone; real yields have moved lower with 5 year TIPS back to just above all-time lows at around -1.67% and 10-year TIPS yields momentarily dropping back below -1.0% again for the first time since Monday’s big rise from lows around -1.05% to highs closer to -0.90%. Falling real yields is typically positive for precious metals like silver, as it makes them a comparatively more attractive investment.

Meanwhile, inflation expectations have risen steeply; 5-year break-evens are at their highest levels since Q2 2018 above 2.1% and 10-year break-evens are back at their highest levels since the back end of 2018. Typically rising inflation expectations are positive for precious metals, which are seen as the best way of hedging against any future inflation crisis.

Falling real yields and rising inflation expectations show that Fed Chair Jerome Powell appears to have triggered the market reaction he wanted; assure markets that Fed QE will not be pulled away prematurely to slow the rise in real yields, whilst adding to the credibility of the Fed’s average inflation targeting policy (shown by markets increasingly betting on inflation returning to the Fed’s target and above 2%). Such a market reaction would typically be positive for precious metals.