Silver consolidates above $25.50 and eyes further gains

• Spot silver prices continue to trade with decent gains above $25.50 and eye a move towards $26.00.
• A weakening dollar and rising inflation expectations have given precious metals a boost on Wednesday.

Spot silver (XAG/USD) prices are consolidating just the north of the $25.50 mark and have maintained a broadly positive bias amid a continuation of soft USD conditions. XAG/USD closed Wednesday FX trade higher by just over 1.5% or slightly more than 40 cents.

Precious metals conform to USD flows

USD has been the main driver of precious metal price action for a second day running, with weakness in the Dollar Index (DXY), which is down about 0.3% on the day, helping hand gains of more than 0.5% to spot gold (XAU/USD) and of more than 1.5% to spot silver. This move higher in precious metals comes despite a rise in US bond yields (US 10-year up 3.2bps to 94.6bps) and steepening of the yield curve (the 2s/10s spread widened by 2.6bps to 82.5bps). Both of these factors are typically negative for precious metals, as higher yields makes investing in bonds versus non-yielding precious metals comparatively more attractive.

However, the reason higher nominal yields today did not hurt the likes of silver and gold is because real yields remained low, or even moved lower (US 10-year TIPS yield dropped back towards Tuesday and Wednesday lows around -1.04% having briefly moved above -1.0% at the height of Brexit optimism). That is because as nominal yields rose, so did inflation expectations (5-year breakeven inflation expectations jumped from below 1.91% to above 1.93%, its highest since last 2018).

As a reminder, precious metals tend to do well when 1) real yields are low and move lower, given that low returns in the bond market prompt investors to allocate capital to non-yeilding precious metals and 2) inflation expectations rise, given that precious metals are seen as the ultimate hedge against any future decline in the value of fiat money (precious metals are considered “real money”, given that they have been used for thousands of years by people all over the world as a medium of exchange).

Positive bias to lift XAG/USD towards $26.00?

Having found solid support at the $25.00 level, XAG/USD is looking to press back towards the $26.00 mark again. It has formed a near-term upwards trend channel on the hourly candles and, as long as this formation holds and USD remains soft (confirmation of a Brexit deal would help with this), then a move to $26.00 looks there for the taking.

XAG/USD hourly chart