Silver slide continues as strong US buck batters precious metal bulls

Spot silver prices (XAG/USD) are coming under selling further selling pressure and is now trading only slightly above the $26.00 mark from Asia Pacific highs of closer to $27.00. It appears as though, in the precious metals complex, gold is again leading the dance; the yellow metal slipped beneath the key $1800 level on Thursday and is down 2.3% or over $40 on the day. XAG/USD, meanwhile, is down 2.6% or about 75 cents.

Driving the day

The major factor driving precious metals markets lower on Thursday is a continued pick up in the US dollar, to which precious metals typically have a fairly strong negative relationship; the Dollar Index (DXY) has rallied above the 91.50 mark for the first time since the first of December and bulls will be targeting a test of the next key area of resistance in the form of the September 2020 low in the 91.70s.

In terms of why the US dollar is picking up, it is difficult to pinpoint any particular drivers; traders are talking about an ongoing short-squeeze, after short positioning entered the year at historic extremes. Weakness elsewhere, such as in the euro, is also being cited; some suggest weakness in the EUR/USD exchange rate can in part be explained by comparatively faster mass vaccination efforts in the US in comparison the EU.

Others are pointing to growing hopes for further fiscal stimulus from the US Congress; on Wednesday, an advisor to US President Joe Biden told Politico that he expected a $1.3T package to eventually pass Congress. Negotiations are currently underway with regards to how to restrict access to the next round of stimulus cheques and US Republican Senator Mitt Romney is reportedly set to unveil a plan to give $3000 to parents for each child as part of any stimulus package. Meanwhile, moderate Democrat Senator Joe Manchin (whose support for any eventual bill will be crucial if it is to pass the Senate given the Democrat’s razor-thin majority) indicated that he approved of Biden’s $1.9T stimulus plan.

The key point here is that stimulus is on its way in one form or another, and markets seem to expect the price tag to be somewhere between $1.3T and Biden’s $1.9T proposal. Most anticipate that further stimulus is likely to send the US economy into overdrive by the second half of this year. Market participants seem to be betting that this will mean US economic outperformance versus its developed market peers (USD positive) and might even result in the Fed having to tighten policy earlier than current guidance suggests (an even greater USD positive).

If both of these end up being the case, USD gains may have further to run and bond yields (real and nominal) are going a lot higher, not a good mix for precious metals.

XAG/USD key levels