Silver grinds back towards Asia session highs above $26.50, up more than 3.0% on the day

Spot silver prices (XAG/USD) are substantially higher on the first trading day of the final trading week of the year. Volumes are thin with many market participants, particularly in Europe and North America still away for Christmas and New Year celebrations, though fundamental developments are keeping investors on their toes. At present, XAG/USD trades with gains of more than 3.0% on the day; the precious metal having rallied above the $26.00 level during early Asia Pacific trade to hit highs just shy of the $26.80 mark, only to then drop back towards $26.00 again before the bulls bought the dip and pushed the pair back above $26.50 in recent trade.

Silver responds positively to US stimulus

Risk appetite seems broadly favourable on Monday; US President Donald Trump abruptly changed his tact on stimulus over the weekend, dropping his threat to veto the $900B bill Covid-19 aid package and $1.4T omnibus speaking package and instead opting to sign the bills into law. Elsewhere, investors are still digesting news that the UK and EU have managed to agree on a free trade deal (meaning the much-feared no-deal outcome has been averted) and mass vaccinations are finally underway in the EU. Moreover, the Astra Zeneca/Oxford University vaccine is soon expected to receive approval in the UK, which will further accelerate mass vaccinations in the country.

The result is that stocks are broadly higher, US bonds are lower (also reflecting expectations for more supply as the government issues debt to fund its stimulus) and crude oil, industrial metals and precious metals markets are broadly higher. USD is also marginally weaker on the day, though FX markets conditions have been a little choppier.

More specifically for precious metals markets; markets seemed initially to be confused as to whether the news that the US government will be pumping the US economy with further deficit-financed spending would ultimately be a precious metal positive or negative; precious metals bears might argue that stimulus is a precious metal positive given that it creates risk on (gains in the stock markets), which will undermine demand for safe havens (like XAG/USD) and that additional government debt will push up US bond yields, reducing the incentive to hold precious metals vs fixed-income investments.

However, the bulls (who seem in control on Monday) might argue that 1) government deficit spending is likely to continue to be financed in large part by the Fed and the combination of continued fiscal and monetary stimulus is inflationary (which benefits inflation hedges such as precious metals) and 2) though nominal yields might rise as a result of more government borrowing, rising inflation expectations are likely to keep real yields in check – the US 10-year TIPS yield remains close to recent lows around -1.04% and 5-year breakeven inflation expectations are pushing towards new annual highs close to 1.94%.

Some analysts have argued that risk appetite by itself will not be enough to deliver a meaningful blow to precious metals; what will be needed is a combination of higher real yields and lower inflation expectations.