Silver sees significant price swings between $25.00 to $27.50

Spot silver (XAG/USD) prices have seen significant volatility on the first trading day of the week as markets digest the latest Covid-19 news out of Europe. In early Asia Pacific trade, silver saw significant safe-haven demand and rallied from opening levels close to $26.00 to as high as $27.41, before then reversing course amid and sliding to hit lows just under $25.00 midway through the European morning session. XAG/USD has since recovered back to above the $26.00 level and trades with gains of just over 1% on the day.

New UK Covid-19 strain roils global markets

The UK government announced that large portions of London and the South East of the UK will be going into a new tier 4 lockdown, which is akin to the national lockdowns seen in H1 2020 and November, as the area struggles to contain the outbreak of a new, more virulent strain of Covid-19 that UK scientists fear could increase the virus reproduction rate by more than 0.4 (in the UK the R rate was last week estimated at between 1.1-1.2, implying that is how many persons each infected person spread the virus too). Much of the recent surge in cases in London and the South East is being attributed to the spread of this new strain and a number of European governments over the weekend took swift action in banning incoming flights from the UK. However, given that cases of the new virus strain are already being detected in Italy, it might be too late for the continent to avoid an outbreak.

Either way, the bad news, coupled with another weekend where the UK and EU failed to agree on a Brexit deal has roiled global markets, with stocks, risk-sensitive currencies, crude oil markets and industrial commodities all feeling the weight of risk-off, while safe-haven assets such as USD have been doing well. Precious metals have seen two-way price action, caught between their obvious safe-haven characteristics and a stronger dollar.

Though a stronger US dollar will be a challenge for the likes of XAG/USD and XAU/USD, recent developments are likely to prove positives for both. For one thing, if this new Covid-19 strain does continue to spread in the UK, across Europe and indeed to other parts of the world like the US, it is likely to encourage authorities to enact stronger lockdown measures which will put cause greater economic pain and will likely prompt major global central banks (ECB, BoE, Fed) into additional monetary easing (most likely to come as more QE); inflation of the money supply has proven powerfully positive for precious metal prices over recent years.

All the while, mass vaccination programmes will continue, which ought to keep a lid on any risk-off slide in stock/commodity prices and USD upside, given that there is still “light at the end of the tunnel”. Once major economies do arrive at the point of herd immunity (which many hope will occur by H2 2021), the economic recovery can start booming again and all that central bank stimulus, which will not be immediately withdrawn, is likely to feed into higher inflation. This will keep real interest rates low, which will keep holding precious metals attractive.