Silver bulls running out of breath below $27.50 ahead of key risk events

• Spot silver prices continue to grind higher but are struggling to surpass $27.50. 
• Traders are still cautious ahead of this week's key events. 

Spot silver (XAG/USD) prices remains solidly higher on the week but the bullish momentum wanes somewhat, with prices up just 0.2% or around 7 cents on Tuesday. $27.50 has proven a solid area of resistance, with spot prices having failed to break convincingly above the level on multiple occasions since Monday’s European session. At present, XAG/USD trades in the $27.30s, but perhaps the caution being demonstrated in the market on Tuesday is warranted given key incoming risk events including Tuesday’s Senate elections in Georgia, Wednesday’s FOMC minutes of the 15-16 December rate decision and NFP numbers on Friday.

Key events incoming

The main event of the week from a financial market perspective is set to be Tuesday’s Senate run-off and special elections in Georgia. As a reminder, two seats are up for grabs in the state and will decide who controls a majority in the Senate. The Democrats need to win both seats if they are to clinch a majority in the Senate and thus have control over Congress, while the Republicans only need to win one seat in order to hold onto their majority.

The election of course will have crucial implications on the Biden Administration’s ability to implement its agenda; if the Democrats can win both seats, thus winning a majority in the Senate and control over Congress, then the incoming Biden Administration and Democrat Party will be able to pursue significant further fiscal stimulus in 2021 (very relevant for precious metals markets), as well as likely being able to implement tougher regulation on big Tech and the energy sector (less relevant for precious metals).

How markets might react to a surprise Democrat victory is subject to intense debate; some think the prospect of further fiscal stimulus and the subsequent boost to economic output will trigger risk on (stocks, industrial commodities, energy and precious metals higher, bonds and USD lower). Some argue the prospect of tougher regulations might trigger downside in stocks. Most agree that a Democrat victory will lead to higher nominal US bond yields. What happens with real yields will be the most important for precious metals markets and will depend on how much the Fed is willing to step in to keep financial conditions accommodative despite higher government borrowing and upwards pressure on yields.

Elsewhere, another point of political focus will be on the Congressional certification of the 2020 Presidential election on 6 January at 18:00GMT. Joe Biden won 306 electoral college votes at the 3 November election versus Donald Trump’s 232. The process is not expected to run as smoothly as it normally would; at least 12 Republicans in the Senate and two-thirds of the Republicans in the House are expected to challenge the outcome of the election. These challenges are not expected to succeed and once the Congressional circus is out of the way, focus will turn to Biden’s inauguration on 20 January.

Data

Meanwhile, a raft of US data is also in focus. ISM manufacturing PMI numbers were just released and came out much stronger than expected; the headline index rose to 60.7, well above expectations for a print of 56.6 and last month’s 57.5. Meanwhile, the subindices were also strong across the board; prices paid rose to 77.6 versus expectations for a rise to 65.7 from last month’s 65.4, its highest number in nearly three years, while new orders and employment were also strong. The data ought only to add further upside to the recent rise in inflation expectations which ought to be net bullish for precious metals such as silver.

Looking to the rest of the week, ISM services data will be released on Thursday and is likely to show a little more weakness given the greater exposure of service jobs to lockdowns, while NFP numbers are out on Friday.