XAG/USD: As real yields rise, silver's collectable appeal could also suffer

Silver, XAG/USD, is lower by some 0.3% in Asia and the bulls are being pressured on their attempts to correct the strong bearish impulse that followed the prior day's response to the Federal Open Market Committee minutes. 

The minutes showed that accelerated tapering will give officials the option of raising rates as soon as March. There was a knee-jerk rally but the dollar ran into offers on Thursday which son turned around again in the mid-New York session.

The DXY, an index that measures the greenback vs a basket of major currencies, was holding onto the 96 areas overnight and US 10 -year yields were probing daily highs in the 1.7530s%.

St. Louis Federal Reserve Bank President James Bullard said at a meeting of the CFA Society St. Louis that a rate increase as early as March was on the table. This gave some life to the greenback again.

"The FOMC is in (a) good position to take additional steps as necessary to control inflation, including allowing passive balance sheet runoff, increasing the policy rate, and adjusting the timing and pace of subsequent policy rate increases," Bullard said.

"With the real economy strong but inflation well above target, US monetary policy has shifted to more directly combat inflation pressure," Bullard said, adding that he expects cases of the omicron variant to slow in the coming weeks.

As a result, the FOMC could decide to increase rates sooner and faster than previously expected, Bullard said, echoing statements in the FOMC minutes of the December meeting released on Wednesday.

"The FOMC could begin increasing the policy rate as early as the March meeting in order to be in a better position to control inflation," Bullard said. "Subsequent rate increases during 2022 could be pulled forward or pushed back depending on inflation developments."

For the day ahead, markets will look to the Nonfarm Payrolls data. However, anything outside of a shock is unlikely to move the needle considering the hawkishness at the Fed.

''The late-December COVID surge likely came too late to prevent a pickup in US payrolls after the gain in November (210k) appeared to be held down by an overly aggressive seasonal factor,'' analysts at TD Securities explained. 

In the near term, however, no matter the outcome of the data, markets will continue to pencil in a Fed balance sheet runoff, which should continue to push real rates higher and weigh on precious metals. 

However, analysts at TD Securities argued that while both gold and silver prices are under pressure,  ''constraints to money supply growth should further sap appetite for all collectables, including silver coins.''

''In contrast, some safe-haven demand is potentially providing some offset to global macro headwinds in gold. Instead, silver prices look more vulnerable given the acceleration in liquidations of ETF holdings, while CTA trend followers are also set to add to their shorts in response to firming downside momentum.''