Silver subdued below $25.50 as markets digest latest US CPI numbers

• Silver remains subdued below the $25.50 mark as real interest rate and inflation break-evens consolidate after big moves.
• The precious metal looks to have carved out a new short-term range for itself between $25.10 and $25.70.

Spot silver prices (XAG/USD) have slipped back below the $25.50 level since the start of Wednesday European trade, with the most recent attempt to get back above this level in recent trade looking to have failed. At present the precious metal trades with losses of about 0.6% or just over 15 cents on the day and is the laggard amongst the four major precious metals (XAU/USD is 0.1% higher, XPD/USD is flat and XPT/USD is 1.0% higher).

Despite the minor knock that silver prices have sustained on Wednesday, the precious metal trades broadly flat on the week and has enjoyed a solid, nearly $1.0 recovery from lows set in the early part of Monday’s Asia Pacific session. Swings in sentiment towards the dollar have been one of the major drivers of silver prices this week, as have moves in real interest rates and inflation break-evens.

Other precious metal market drivers this week

Another crucial determinant of the near-term direction of precious metals markets is still what happens in US bond markets. The recent, more consolidative trade of the past two days is in fitting with a stabilisation in US real yields; after rallying from close to -1.10% to now around -0.95% over the past seven days, 10-year TIPS yields are consolidating. Meanwhile, 10-year break-evens have dropped back a little to closer to 2.03% from earlier in the week highs above 2.07%. amid a modest pullback in nominal yields (10-year yields nearly hit 1.18% earlier in the week but are now closer to 1.11%).

As a reminder, higher real yields is bad for precious metals markets (as yields rise the incentive to shift capital weighting from gold and silver into bond rises), while higher inflation expectations is a positive (given that precious metals are seen as the ultimate hedge against inflation).

Real yields had initially been on the rise in anticipation of much more debt issuance from the US government under the Biden administrations, as well as more and more market participants subscribing to “taper talk”, i.e. a build-up of expectations that as the US economy starts to boom in H2 2021, the Fed might be tempted to wind down its QE programme (which keep US government yields artificially suppressed) faster than expected. However, contributing to the recent stabilisation in real yields and drop back in nominal yields over the past day or so has been a hoard of Fed speakers who have larger been keen to emphasise that the bank if not thinking about changing policy, or indeed withdrawing stimulus, any time soon.

Markets unfazed by US CPI numbers

Given the rally in break-even inflation expectations over the past few weeks, more attention than usual was paid to Wednesday’s CPI data release. Headline inflation was a little stronger than expected on a YoY basis, coming in at 1.4% (versus expectations for a 1.3% reading). Core measures of CPI were in line with expectations (1.6% YoY). Lower energy prices continue to drag the headline number down, but given the recent rise in crude oil prices, are expecting to support the headline number going forwards. The numbers are of course backward-looking, with the data collected at a time when the Covid-19 pandemic continued to worsen in the US. Once the economy is able to reopen a little more normally, this also ought to present some upside risks to costs. But this increase in inflation is unlikely to show up for at least a few more months.

XAG/USD carves out a near-term range

XAG/USD prices found decent support around the $25.10 area, which was Tuesday’s low and seem to have carved out what may become something of a near-term intraday range, with the aforementioned $25.10 area acting as support and the early Wednesday Asia Pacific highs just below $25.70 acting as resistance.