Silver slump continues with $25.00 level in sight

Spot silver (XAG/USD) prices have been under continual pressure since the start of US trading hours, pressured predominantly by a pickup in the US dollar that has seen the Dollar Index (DXY) rise from lows just above 90.00 to as high as the 90.60s. Note, precious metals such as silver have a strongly negative correlation to the US dollar.

As things stand, the precious metal trades with losses of close to $1.0 on the day, or more than 3.5%, with XAG/USD sliding to lows just to the north of the $25.00 level from Asia Pacific session highs above $26.50. If USD continues to strengthen, a test of the $25.00 level and Monday's lows just below it is highly likely.

USD rallies, silver suffers

Thin pre-Christmas conditions and year-end position adjustment flows certainly could be factors feeding into US dollar strength on Tuesday, but most analysts are more likely to point to ongoing concerns regarding the new mutant Covid-19 strain spreading in the UK and ongoing Brexit angst as working in the US dollars favour. As noted above, this is working against precious metals such as silver which have a negative correlation to the buck.

Other factors to consider for precious metals such as real yields and inflation expectations have sent much less decisive signals; the nominal US treasury yield curve has seen pronounced bull flattening (which tends to be a positive for precious metals) and the 10-year TIPS yields remain at suppressed levels around -1.03% (also supportive for precious metals). But 10-year breakeven inflation expectations continue to fall back from last Friday’s highs at 1.96%, and are now at 1.92% (a precious metal negative).

Should the Covid-19 situation take a notable turn for the worse (i.e. imagine if the current testing being done by Pfizer/BioNTech shows their vaccine to be ineffective versus the new mutant strain), the significant risk-off flows are likely to trigger further demand for dollars and are would be likely to cause further downside in inflation expectations, which could both prove strongly precious metal negative in the short-run. Precious metal bulls will take solace in the knowledge that a highly dovish Fed will be there to keep real-yields at or at least close to all-time lows, which ought to keep long-term precious metal investors feeling content to hold.

XAG/USD daily chart