Silver fends off stronger USD dollar, ranges around $27.00 as inflation expectations rise

Spot silver prices (XAG/USD) have been uneventful on the final trading day of the week and have for the most ranged either side of the $27.00 level. At present, spot silver trades with modest gains of about 0.2% or about 6 cents on the day, despite a notably stronger US dollar.

Driving the day

It’s been a slow day in terms of updates on key market themes such as US fiscal stimulus, central banks and the pandemic. But markets have nonetheless been on the move, with the most interesting action being seen in global bond markets and in the USD; yields have been rising in Europe and the US (US 10-year yields are current up nearly 4bps in the 1.19s% and briefly surpassed the psychological 1.20% level, while the 2s/10s spread has widened about 3bps and is fast closing in on the 110bps mark, its highest since early 2016).

Higher US treasury yields and bear steepening of the US treasury curve is contributing to a stronger US dollar on the final trading day of the week (even versus the euro despite the fact that Eurozone bond yields have also rallied by a similar margin). However, somewhat unusually, higher yields and the stronger dollar are not having a negative effect on silver markets.

That’s likely because the rise in US (and European) yields is primarily being driven by a rise in inflation expectations; 10-year break-evens are up over 2bps on Friday and back above the 2.20% level. Meanwhile, though US real yields are a little higher on the day, the rally is nowhere near as much as in nominal yields (hence the rise in inflation expectations); the US 10-year TIPS yield is currently at -1.025%, up just over 1bps on the day.

Note that precious metals are seen as a hedge against inflation, so when inflation expectations rise, this is a positive for them. Meanwhile, one of the big criticisms of investing in precious metals is that they are a non-yields asset. But with a large percentage of global bond markets now providing negative real yields (i.e. meaning investors are literally paying the borrowers to buy and hold those bonds), non-yielding precious metals seem comparatively more attractive; precious metals are thus sensitive to movements in real interest rates.