Silver Price Analysis: XAG/USD jumped back above $23.00 despite surging US real yields, dead-cat bounce?

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  • Spot silver jumped back above $23.00 on Tuesday despite a sharp upside in US real yields.
  • Precious metals seemingly took advantage of a weakening dollar (against most of its G10 peers) after underwhelming US data.

Despite a continued sharp rise in US real yields that would typically be a negative for precious metals given the increased opportunity cost associated with non-yielding assets, spot silver (XAG/USD) prices have gained ground on Tuesday. Spot prices have in recent trade rebounded back to the north of the $23.00 per troy ounce level after finding support in the $22.60s in the late European morning. Buyers came in ahead of last week’s $22.60 low and the 21-day moving average at $22.55. Short-term silver bulls will now be eyeing a test of recent highs in the $23.40 area which happen also to coincide with the 50DMA at $23.39.

Silver and other precious metals (like gold) have gained ground on Tuesday as they take advantage of dollar weakness (USD is lower against all G10 currencies aside from the euro and yen, which is keeping the DXY flat). US data seems to have net-net weighed on the buck on Tuesday after the ISM manufacturing survey showed activity slowing in December and inflationary pressures as a result of supply chain snags subsiding substantially. Meanwhile, the headline JOLTs Job Opening figure also missed expectations and there appear to be some bets mark participants making bets that this will alleviate some pressure on the Fed to tighten so aggressively this year.

The JOLTs survey did indicate a record number of people quitting their job in November, however, which is seen as one of the best indicators of a hot labour market (people confident they can “do better” than their current job). Meanwhile, the most dovish (historically) Fed member Neil Kashkari said he now sees two rate hikes in 2022, having not long ago wanted the Fed to wait into 2024 before hiking. Real yields seem to be getting the message that economic conditions, despite today’s minor data blips, still warrant some Fed tightening and the Fed seems ready to eagerly oblige.

10-year TIPS yields are above -0.95% on Tuesday, having surged from under -1.10% as recently as last Friday as traders bet on higher long-term interest rates (that will be closer to long-term inflation) as economic optimism prevails over Omicron-related pessimism. Indeed, it very much seems at this stage that Omicron is significantly milder than prior strains and its associated economic damage is far less. The rally in real yields suggests that Tuesday’s bounce in silver and gold may prove nothing more than a dead-cat bounce. If Fed tightening combined with a strong US economy in 2022 does push nominal 10-year yields above 2.0% but keep inflation expectations in check in the mid-2s%, then that means 10-year real yields are headed back towards 0.0%. That suggests substantial downside for precious metals like silver from current levels. Medium-term bears will be looking for XAG/USD to test recent lows in the $21.00s in the coming weeks.