Silver Price Analysis: XAG/USD eyeing a move above $24.00 level as global bond yields plummet

Spot silver (XAG/USD) prices have gained significant ground in recent trade and, having dipped as low as $23.00/oz on Wednesday, are now not far from trading in positive territory on the week in the $23.80s, though for now the precious metal is struggling to reconquer the $24.00 level. If XAG/USD can get above $24.00, this would mean that prices have broken out of a recent negative trend in place since 22 October. Any resultant technical buying could see XAG/USD continue higher towards the $24.50 level and perhaps even as high the $24.80s, where a double top from 3 September and 22 October resides.

Such a move higher would rely on continued downside in the global and US yield environment. For reference, much of Thursday’s rally in spot silver, which has seen prices rise from around $23.50, owes itself to a sharp drop in developed market bond yields in wake of a much more dovish than expected BoE policy announcement; UK 2-year yields have dropped a stunning more than 30bps to under 0.50% from above 0.7% prior to the policy announcement (biggest one-day drop since March 2020), while 10-year UK yields are down nearly 15bps to under 1.0%.

This has led yields in the US and elsewhere lower; US 2-year yields are down roughly 6bps and have been testing the 0.40% level in recent trade, while 10-year yields have pulled back from above 1.60% to the low 1.50s%. Real yields have also been heading lower in the US (a good indicator that it is dovish central bank vibes driving bond yields lower), with the 10-year TIPS yield back sharply to just above -1.05% from previously as high as -0.95%. The key point is that lower bond yields decrease the opportunity cost of holding non-yields precious metals such as silver, thus increasing investor demand and pushing their prices up.

Strong data to send yields up again?

But continued downside in global bond yields is far from guaranteed, with Friday’s US jobs report having the potential to throw a wrench into proceedings. The Fed yesterday pretty much put its policy on autopilot for the rest of 2021 with its $15B/month QE taper announcement for November and December, but essentially said uncertainty about the state of the economy (inflation and the jobs market) in 2022 is high and thus the bank is preparing for a range of possible outcomes. That should be interpreted as the Fed saying they are “data-dependent” and if the data justifies a hawkish shift, they will shift hawkish, while if it justifies a dovish shift, they will be more patient with monetary policy stimulus removal. That makes upcoming data releases, such as Friday’s jobs report, all the more important.

If the data on Friday is strong (i.e. payroll number of 500K+, further decline in the unemployment rate and further upside in rates of wage growth), this will boost optimism that full employment is not too far off (a key condition the Fed says it wants to see before hiking interest rates). That would likely see short and long-term US (and probably global) bond yields supported. A move back towards 0.50% for the 2-year and back to 1.60% for the 10-year would not be a good thing for silver, which, in this scenario, may slide back towards this week’s lows around $23.00/oz.