Silver dumps from $27.00 to below $26.00 amid technical selling, rising real yields

Spot silver prices (XAG/USD) dumped shortly after Friday’s European equity cash open on Friday, dropping nearly $1 from just under $27.00 to just below $26.00 before aggressively bouncing back towards $26.50. In recent trade, the selling pressure has resumed and the precious metal is back below $26.00 again and pressing new lows in the $25.80s. On the day, XAG/USD is down over 4.5% or nearly $1.20, with similar losses being seen across other precious metals (XAU/USD down over 2.5% or $50 and trades well below $1900).

Technical selling appears to have been the main factor behind Friday’s selloff, with XAG/USD breaking below a medium-term uptrend that had been in play since early December.

Fundamentals are also weighing; the Dollar Index, with which precious metals such as silver are negatively correlated, briefly topped 90.00 in the early part of Friday’s European session (though in fairness, the DXY is heading back towards 89.50 and is now down on the day). Meanwhile, US real yields (with which precious metals are also negatively correlated) also continue to rise; the 10-year TIPS yield is trying to move above the -1.0% mark for the second time this week and a move back towards November highs above -0.8% could see precious metals such as silver move substantially lower from current levels.

NFP numbers

Recently released US labour market data for December has not had much of a lasting impact on silver; spot prices saw a minor 20 cents dip in the immediate aftermath of the broadly underwhelming report but quickly retraced. Recent selling pressure seems to be a resumption of earlier trends.

As a recap of the data; 140K jobs were lost in the US economy in December, well below expectations for a modest gain of 70K jobs. According to the Bureau of Labour Statistics (BLS), 372K waiter and bartender jobs were lost in December (largely as a result of Covid-19 restrictions), which weighed on the headline number. Meanwhile, the manufacturing sector did well, gaining 38K jobs versus expectations for a more modest gain of 20K. The unemployment rate remained unchanged at 6.7% versus expectations for a rise to 6.8% and the participation rate was unchanged at 61.5%.

As markets focus on incoming fiscal stimulus from a Democrat-controlled Congress, more stability under the Biden administration, a move towards herd immunity amid the mass Covdi-19 vaccination push looked and a general improvement in global economic growth and trade conditions later in the year, traders and investors have looked through Friday’s grim labour market report. There is too much light at the end of the tunnel for markets to care about near-term Covid-19 concerns/economic weakness; the S&P 500 just opened at fresh intra-day all-time highs above 3810, despite more than 4K Americans dying from Covid-19 on Thursday, a new daily record.

All this above-mentioned optimism is pushing nominal and real US yields higher and having a negative effect on yield sensitive precious metals like silver. Note that inflation expectations have also been rallying; 5-year break-evens have moved above 2.1% on Friday. If this continues, this may cushion the downside for precious metals, which are seen as a hedge against inflation.

Technical selling weighs on XAG/USD

XAG/USD broke below key uptrend support linking the 29 November, 11, 14, 15 and 23 December and 6 January lows earlier during Friday’s session, a move that coincided with a break below the $27.00 level. The metal found support at $26.00, which coincides with the 29 December lows. Currently, the precious metal is trading closer to $26.50, but has struggled to rally above resistance in the form of Wednesday’s $26.60 low. Should the precious metal move back towards low of the day and the $26.00 mark, a test of its 21-day moving average at $25.77 may be in store.

XAG/USD four hour chart