Silvers slump continues as spot prices slide to fresh three weeks lows below $25.00

Spot silver prices (XAG/USD) trade with significant losses on Monday and, having failed an earlier attempt to settle above the $25.00 level, have lost grip of the big figure, although stayed supported ahead of the $24.50 and the Asia Pacific session lows beneath the $24.40. These lows set during the Asia Pacific session were three-week lows.

On the day, the precious metal trades with losses of just over 2.0% or close to more than 50 cents. Downside in silver is in fitting with losses being seen across precious metals markets (spot gold is down 0.4%) and is primarily being driven by rising US bond yields and a rallying US dollar.

Rising yields trigger resurgent buck, risk-off markets

The dominant force in markets on Monday, the first day of the second full trading week of the year, are rising US bond yields, or more specifically, rising US real yields. The 10-year TIPS yield (the real yield on the US 10-year) is currently up more than 3bps to around -0.93%, while nominal yields are currently up nearly 2bps on the day.

The increase in the rate of real return investors get when investing in US government debt is of course triggering inflows into the US dollar (investors must buy USD before they can buy USD denominated US government debt). The combination of a higher (safe-haven) USD and higher US yields is also triggering losses in other asset classes; US equities trade lower (S&P 500 -0.8%), crude oil markets (WTI -1.0%) and risk-sensitive currencies (AUD, NZD, CAD all down roughly 1.0% versus the US dollar).

Concerns about the spread of Covid-19 (German officials think hospitals in some areas are close to being overwhelmed and similar fears are being felt over in the UK) and US/China relations (the US indicated it will improve ties with Taiwan, to the anger of China and is reportedly examining further “options” on China) are adding to the reason to buy USD and sell riskier assets like stocks, commodities and high-beta FX. Moreover, as analysts have been pointing out for weeks; USD short positions have been stretched for some time and stock market valuations are frothy – more reason to take profit on risk on Q4 2020 positioning.

But the main factor weighing on precious metals markets today is not “risk-off” perse, but higher real yields (which reduce the incentive to hold precious metals over fixed income) and the stronger US dollar (which is negatively correlated to the likes of silver and gold). Yields are being pushed higher by the notion that the incoming Biden administration and Democrat-controlled Congress will issue a lot of new government debt in order to finance additional fiscal stimulus (over the weekend, Incoming US President Joe Biden reiterated his call for trillions more in spending).