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  • Spot silver has seen a pickup in volatility in recent trade despite a lack of fundamental catalysts.
  • Looking through short-term price swings, a weakening US dollar has been supporting the precious metal on Tuesday.

Spot silver (XAG/USD) has seen an unexplained pick up in volatility since the US cash equity open at 14:30GMT; without warning, XAU/USD prices dropped from the $27.50s to just above the $27.00 mark, but have now retraced back to the $27.30s. Prior to the pick up in volatility, silver markets had been benefitting from a drift lower in the US dollar. As things stand, XAG/USD is still trading with gains of around 0.4% or 10 cents on the day and a test of earlier session highs around $27.80 is likely if the buck continues to wane. The more ambitious of the silver bulls will hope that the market’s recent reflationary backdrop (that has benefitted inflation-sensitive assets such as commodities and stock markets) continues and can lift the precious metal back to highs set at the start of the month amid peak retail investor interest.

Driving the day

The “reflation trade” (i.e. a rise in inflation expectations that pushes commodities and stocks highs and drives bond yield curve steepening) has been alive and kicking in recent days, coinciding with a blistering rally in the US stock market and in crude oil as markets bet 1) that the US Congress will deliver big on the next round of fiscal stimulus spending, 2) that central banks will remain accommodative in the face of rising inflation amid their new mantra to let inflation run a little hotter than they have been keen to do in the past and 3) that accelerating vaccine rollouts and falling infection numbers will driving a strong rebound in economic activity in the second half of 2021.

Since the start of the month, US 10-year break-even inflation expectations have rallied from around 2.1% to above 2.2% and this has supported “inflation hedges” like precious metals. Inflationary impulses have weakened a tad on Tuesday as markets take a breather from recent moves; 10-year breakevens are a touch lower in line with a slight retracement back from recent highs in stocks and crude oil markets.  

But precious metals are garnering impetus from elsewhere; as noted, the US dollar, to which precious metals typically have a negative correlation, is on the back foot. Moreover, real US bond yields are dropping; the US 10-year TIPS yield is down around two and a half basis points on Tuesday to below -1.05%, very close to historic all-time lows set on the first trading day of the year of just under -1.10%.

Wednesday sees the release of US Consumer Price Inflation data, which if stronger than anticipated, could reinvigorate recent “reflationary” market flows, which would likely benefit precious metals markets so long as Fed Chair Jerome Powell, who is speaking later on Wednesday evening, sticks to the usual Fed stance that policy will remain highly accommodative and the Fed will look through any “transitory” pick up in inflation in the coming months. Continued dovishness from the Fed ought to keep real yields under pressure.