Silver gains capped at $26.00 level and 21DMA

Spot silver prices (XAG/USD) now trade a little lower on the day, having pared back on gains made during the Asia Pacific session that took spot prices as high as $26.05 and briefly above the 21-day moving average at just below the psychological $26.00 level. At present, XAG/USD trades in the $25.70s, down about 0.4% or 10 cents on the day despite the broadly weaker US dollar.

Sentiment analysis

Sentiment is mixed on Thursday, with US stocks flat and European bourses mostly in the red alongside crude oil prices, while in FX, USD is a laggard and bond yields are higher post-ECB. However, the ECB monetary policy decision (aside from sounding slightly more hawkish on the PEPP and lending some strength to EUR) delivered few surprises and did not seem to impact broader market sentiment too much. Major global central bank set to keep monetary policy ultra-accommodative for the foreseeable future, as expected, is the main takeaway as far as broad financial market sentiment is concerned.

Meanwhile, broadly better than forecast US data has not left a lasting impact on sentiment. Weekly US initial jobless claims were a little better than expected at 900K (consensus was for 910K) and the week prior saw a hefty downwards revision to 926K from 965K. So the jobs data was not as bad as expected, but is still very high by historical standards and well above the Q4 2020 average, a reflection of the worsening impact of the Covid-19 pandemic. Sticking with US data; the January Philly Fed manufacturing index was stronger than expected, coming in at 26.5 (consensus was for 12) and up from 9.1 in December. This bodes well for US Markit manufacturing PMI data on Friday.

Markets remain focused on broader macro themes, about which (suggests recent price action with US stocks at all-time highs, commodities close to recent highs and risk-sensitive USD pairs close to recent highs) markets seem to be taking a favourable view;

Pandemic – Nerves persist regarding the worsening state of the pandemic spread in Europe, the US and elsewhere. Countries are moving into tougher lockdown and given fears about the international spread of new variants, some of which are feared might be resistant to vaccine acquired immunity, are leading countries to increasingly close off borders (UK may be isolated from Europe soon). Vaccine rollouts remain a broad counterweight to these concerns, or even outright market positive; expectations are for some degree of herd immunity to have been acquired in major developed markets by Summer. However, fears that 1) new variants may be resistant to vaccine-induced immunity and 2) that the one dose strategy being pursued by some countries (notably the UK) may not be as effective as hoped present downside risk. However, vaccine makers in Oxford University (makers of the AstraZeneca vaccine) are already reportedly mobilising to tweak their vaccine to take into account new Covid-19 variations.

Stimulus – G10 central bank stimulus, most notably from the Fed and ECB, looks here to stay for some time – the key factor underpinning risk appetite and keeping real yields at low. Hopes for further fiscal stimulus out of the US has further supported risk appetite in the last few weeks but has not led to a substantial rise in US real yields (which may have threatened risk appetite). Low real yields keep precious metal markets underpinned. Meanwhile, all the above-noted stimulus has been pumping inflation expectations higher, which also keeps precious metals markets underpinned.

ABN Amro’s Silver Outlook

ABN Amro expect a significant improvement in US economic conditions to result in the Fed tapering its asset purchase programme in 2022, leading to a stronger USD and higher nominal and real yields. This, they say, is a negative for silver prices. The bank reduced its 2021 average silver price forecast to $24.60 from $27.20, but they expect the precious metal to outperform gold on a relative basis, given the former’s more substantial industrial demand component. “We expect a further recovery in the industrial sector so this will support silver prices” they say.