Silver Price Analysis: XAG/USD underpinned by Russia/Ukraine war fears, shrugs off strong buck, higher yields

Despite the stronger US dollar and a sharp rise in US government bond yields across the curve in wake of the latest remarks from hawkish Fed policymaker James Bullard, spot silver (XAG/USD) prices have been on the front foot. Spot prices run out of steam and were unable to test the $24.00 per troy ounce level, but at current levels around $23.80, continue to trade about 0.9% or more than 20 cents higher on the day. For reference, Bullard, who is St Louis Fed President and a voting FOMC member in 2022, doubled down on his call for 100bps in Fed tightening by July 1. That gave Fed tightening bets a pump (money markets now price a more than 60% chance of a 50bps hike in March versus closer to 50% prior to his remarks), exerting upwards pressure on yields and the buck.

But precious metals have escaped the negative impact of higher yields, which increase the opportunity cost of holding non-yielding assets, and a stronger buck, which makes them more expensive to non-USD holding buyers, due to a continued safe-haven bid. Indeed, while Russian Foreign Minister Sergey Lavrov on Monday advised Russian President Vladimir Putin to continue with diplomacy for now, fears of imminent Russian military action against Ukraine remain elevated. US press, citing US intelligence, have been furiously reporting in recent days that an invasion could come as soon as this week.

Of course, when military tensions between Russia, who want to ensure Ukraine never joins NATO, and the West, who want to ensure Russia doesn’t invade Ukraine, rise, familiar fears about escalation towards a nuclear conflict arise. While a Russian invasion into Ukraine, a non-NATO member, wouldn’t directly trigger Russia/NATO conflict, there is a risk that conflict could spill across Ukraine’s borders to neighboring NATO countries (like Poland). Otherwise, and perhaps a more important reason why traders might be piling into precious metals, is the risks to the global economy that a Russia/Ukraine war presents.

If the West was to hit Russia with massive economic sanctions, Russia could hit back by restricting natural resource exports (oil, gas, industrial metals, ammonia for fertiliser) that could severely damage the global economy and create inflation. In that sense, silver/other precious metals might make sense as a sort of global “stagflation” hedge. An outbreak of war could easily see XAG/USD hit annual highs to the north of $24.50. Fed speak and US data (PPI, Retail Sales) will play a secondary role to this theme this week.