Silver rises back to $27.50 as market bets on inflation, US dollar slips

Spot silver prices (XAG/USD) have been firmly on the front foot in recent trade amid a combination of US dollar weakness and a market that has been aggressively betting on higher inflation going forward. XAG/USD rallied above the $27.00 level in the early part of Monday Asia Pacific trade, but then lost momentum and proceeded to consolidate around the psychologically important level until the arrival of US traders; since 11:00GMT, the precious metal has again been firmly on the front foot, rallying from just above $27.00 to post daily highs above $27.50. As of right now, XAG/USD is trading just below the $27.50 mark and is up about 2.0% or just over 50 cents on the day.

Markets bet on reflation

US break-even inflation expectations (calculated by subtracting real yield from the nominal yield) have been on the rise; 10-year break-evens have moved to their highest levels since 2014 above 2.20% while 30-year break-evens are back close to their highest levels since 2018 just to the south of 2.20%. Higher inflation expectations are a result of increased bets that the US Congress, which voted in favour of fast-tracking the next stimulus package via budget reconciliation last Friday, will deliver big on the spending, sending the US economic recovery into overdrive and prices higher.

Meanwhile, optimism for a rapid US and global economic recovery later in the year and beyond continues to be underpinned that mass vaccination efforts will be successful in bringing the Covid-19 pandemic under control, despite concerning news from AstraZeneca released on Monday that its vaccine might be only 10% effective against the South African strain of Covid-19.

With precious metals seen as the ultimate hedge against inflation (i.e. when fiat money loses value over time, the nominal value of precious metals typically rises to offset this), higher inflation expectations are providing a tailwind to the precious metals market. Silver, gold, palladium and platinum are all making strong strides to the upside on Monday.

Elsewhere, another tailwind for gold has been some downside seen in the US dollar; in recent trade, the Dollar Index (DXY) has slipped below the 91.00 level, though losses are remaining broadly contained at around 0.1% on the day for now. Given the negative correlation precious metals such as silver have to USD, this is also providing some support.