Spot silver prices have undergone an enormous more than 6% rally on Tuesday from just above $22.50 at the Monday FX market close to just below $24.00 going into the Tuesday FX close. As things stand, XAG/USD trades with gains of roughly $1.40 on the day.
The US 10-year inflation breakeven rose above 1.8% on Tuesday (an indication that markets expect inflation to average 1.8% over the next 10 years), its highest level since May 2019. Meanwhile, PMI reports from around the world on Tuesday also pointed to the likelihood of rising inflation;
Market’s seem to have sensed the smell of higher incoming inflation in the air; US treasury yields shot higher on Tuesday (10-year bond yields rising roughly 8bps to 0.921%) and the curve steepened (the 2-year 10-year bond yield spread widened by just under 6bps).
However, with Fed officials continuing to signal rates at zero until at least 2023 and a continuation of accommodative policy into the foreseeable future, the chances are that US bond yields will not rise as much as inflation expectations, meaning that US real-yields are likely to remain well below 0.0%.
As many analysts have pointed out over recent weeks, the subdued real rate environment and the fact that real rates are expected to remain at lows for the foreseeable future boosts the attractiveness of precious metals as an alternative investment to fixed income. Likely, this narrative was one of the key reasons why precious metal bulls were able to regain control on Tuesday, as well as those more enticed to buy precious metals at favourable prices compared to recent months.
Whether Tuesday’s move to the upside signals a resumption of the precious metals bull market is one thing, but the low real rate narrative is likely to continue to offer support to the complex for the foreseeable future.
Silver crashed through a number of key areas of resistance during its rally on Tuesday. Firstly, the precious metal broke back above a short-term downtrend that it had been trapped within for most of the latter half of November. Moreover, XAG/USD also broke back above a longer-term uptrend linking the 24 September and 29 October lows. The rally was only paused as the precious metal struck its 21 and 50-day moving averages, which sit right above the $24.00 level.
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