Silver shines the brightest while the screw keeps turning for dollar bulls

Silver prices have been extending their upside despite the greenback beginning to show some signs of stabilisation with a double bottom in the DXY on the 4hr charts.

At the time of writing, XAG/USD is trading at $29.0972 which is up 2.8% having travelled from a low of $27.8317 to a high of $29.4120. 

We saw a sharp correction on precious metals prices on Friday following a marginal increase in real rates which just goes to show how vulnerable bulls are at such extreme levels.

However, while the weaker hands may have fled the scene at the first sign of barriers to the upside, silver is could be a favourite on the same notions considering its allure with respect to its industrial qualities. 

Silver continues to outperform and remains our precious metal favorite as a clean positioning slate, strong investment flows and robust industrial demand combine for strong performance at a time when the microstructure creates a disincentive for silver bullion traders to sell,

analysts at TD Securities argued.

The nuts and bolts of the dollar's demise

As for the US dollar, funds have turned net short in USD for the first time since May 2018, while asset managers sold further.

The broad trend of dollar weakness remains intact given a highly dovish Fed.

However, that is not to say that spot prices can not respond aggressively to such themes as the worsening US-China relations or substantially improved data. 

The latter, mind you, is not a likely scenario given the spread of the virus and changes in consumer behaviours. 

The nuts and bolts of the dollar's demise stem in the main from the US real yields story as the Fed keep rates low, while US inflation expectations are on the rise (despite the latest US CPI in contrast to such a notion, falling 1.9% in the Q2 having risen earlier in the year. core CPI is at its lowest level since the financial crisis).

However, so long as the FX market continues to be pricing ahead of a possible Fed adoption of an average inflation target in September, the broader themes remain broadly dollar negative and bullish precious metals. 

Looking ahead to this week, the CPI likely rose strongly, and not just due to gasoline, according to analysts at TD Securities. 

As in June, when core prices rose a solid 0.235%, we expect unwinding of some of the March-May plunge in travel-related prices to outweigh slowing in rents. That said, we think the slowing in rents is more indicative of the trend in the year ahead. The y/y pace in core prices likely remained low at 1.2% in July.

Silver levels