Silver prices surge as markets bet on inflation-inducing stimulus

Spot silver (XAG/USD) prices have seen significant upside on Wednesday, rallying north of 2% or more than 50 cents to come within striking distance of last week’s $25.895 highs as markets bet on inflation-inducing stimulus. That marks a sharp turnaround from a pre-US open sell-off that saw prices drop almost all the way back to the $25.00 level.

US President Joe Biden was sworn in without too much by way of surprises, but markets have maintained a strongly risk on bias throughout and is a continuation of the move that began before former Fed Chair and US Treasury Secretary nominee Janet Yellen’s testimony to Congress on Tuesday; US equities are up and at all-time highs, risk-sensitive currencies are for the most part higher and commodities (energy, precious and industrial metals) are up also.

Reflation hopes boost silver

Former Fed Chairwoman and US Treasury Secretary nominee Janet Yellen testified before the Senate Finance Committee on Tuesday and her rhetoric/tone on the urgent need for drastic action with regards to more stimulus spending seems to instilled optimism in the market about the outlook for the US recovery and impact this will have on inflation. Break-even inflation expectations rallied on Wednesday, with 10-year break-evens at one point rising as high as 2.1% from 2.09% on Tuesday and 30-year break-even rising back towards multi-year highs around 2.12% from under 2.10% on Tuesday. With precious metals such as silver seen as a hedge against future inflation, this is a positive for the likes of silver.

Moreover, markets are suggesting that there is growing confidence that the Fed will be there to 1) keep interest rates low and ultra-accommodative and 2) soak up the majority of new US government debt issuance via its asset purchase programme. In wake of the recent “taper scare” (when markets suddenly became fearful that the Fed might start tapering its QE programme soon and so real and nominal yields rose), real yields have been moving lower again; the 5-year TIPS is plugging fresh all-time lows in the mid-1.70s%, 10-year TIPS has dropped about 1bps to 1.04%. 30-year TIPS is flat at -0.289%. The lower real yields, the more attractive non-yielding precious metals become as an alternate asset, helping the likes of silver.