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  • Silver prices are seeing further gains on Friday amid continues retail demand speculation and rising inflation expectations.
  • Spot prices at one point rallied above the $27.50 mark.

Spot silver (XAG/USD) prices are seeing further upside on the final trading session of the week, as markets continue to anticipate a potential surge of retail demand and as inflation expectations rise. Spot prices rallied briefly above the $27.50 mark and are eyeing a test of monthly highs of just below $28.00. A break above that level might open the door to a surge towards 2020 highs of just shy of the $30 level. At present, spot prices are up just shy of 3% on the day and other silver related assets are also seeing upside; silver futures are more than 5%, popular silver ETF SLV is up more than 2% and silver mining company First Majestic Silver Corp (AG) is up another 10% having posted gains of more than 20% on Thursday.

In terms of fundamentals impacting the market today; Johnson & Johnson released their final vaccine trial results, which seems not to impact risk appetite nor precious metal market sentiment too much. Whilst the headline efficacy of the vaccine was not as high as the Pfizer or Moderna vaccines (average of 66% efficacy globally), and showed somewhat disappointing efficacy against the South African strain of Covid-19, the vaccine was 85% effective in preventing severe disease across all global testing regions. Given that the vaccine is only one shot, it ought to further accelerate global vaccination efforts, and comes off the back of positive Novavax trial data released on Thursday. Further cuts to European vaccine deliveries, this time from Moderna, may have outweighed any potential vaccine optimism.

Retail speculation

Precious metal traders remain on high alert for any attempt by the Reddit retail mob, who have so far focused their efforts on pumping small-cap, highly shorted stocks such as GameStop, to try to bring about a short-squeeze in the silver market. “In the very short term, I would think people would be cautious about holding a short in precious metals, irrespective of the fundamental view/what other markets are doing,” said Marcus Garvey, head of metals and bulks commodity strategy at Macquarie.

However, Adrian Ash, director of research at brokerage BullionVault, commented that it would be unlikely that they (referring to the Redditor retail traders) would be able to have the same effect on a commodity like silver; “short-squeezing a stock with short interest of 140% is one thing, but short-squeezing a physical commodity where market-ready stockpiles are three times average daily futures volume is another,” he said. Thursday’s price spike “will struggle to grab or hold the Reddit crowd’s attention for long.”

Signals of rising inflation

Separately, and back in the world of real fundamentals, the final days of the week have seen sent bullish signals to precious metals markets with regards to inflation and future expectations for inflation; recall that preliminary German Consumer Price Inflation numbers released on Thursday for January saw a huge upside surprise. A similarly large upside surprise was seen out of Spain during Friday European morning session. Meanwhile, US Core PCE data (the Fed’s favoured inflation gauge), this time for December, saw a surprise rise on a YoY basis to 1.5% from 1.4% in November, against expectations for a drop to 1.3%. That means that inflation picked up into the end of the year despite demand weakness as a result of a slow-down in economic activity as a result of the more pervasive virus.

Meanwhile, the Fed on Wednesday came across as dovish as can be and Fed Chair Jerome Powell was again at pains to emphasise that the Fed will not over-react to a rise in inflation, unless that rise is sustained. Essentially, the Fed is signalling that it will be behind the curve if inflation does start to rise uncontrollably. Meanwhile, ECB commentary has been mixed but the indication from sources is that further rate cuts are under discussion as a means to reduce the rate of EUR appreciation. In other words, more (inflationary) stimulus is on the cards.

Amid the stronger than expected hard inflation data and pro-inflationary narratives coming out of major central banks, inflation expectations are seeing upside; US 10-year break-even inflation expectations rallied a further 4bps to nearly 2.15% to match their highest levels since the end of 2018.

Remember that what’s good for inflation expectations (i.e. signs of rising inflation and lots of monetary and fiscal stimulus) is typically good for precious metals markets. Developments over the past three days are thus also likely to be offering the precious metals complex some support alongside all of the retail market speculation.  

Key levels XAG/USD