XAG / USD jumped above USD 23.00 again despite rising US real income, dead cat bounce?

  • Spot silver jumped back above $ 23.00 on Tuesday despite a sharp spike in real US yields.
  • Precious metals apparently benefited from a weaker dollar (compared to most of its G10 competitors) after not overwhelming the US data.

Spot silver (XAG / USD) prices gained ground on Tuesday despite a sustained sharp spike in US real yields, which would normally be negative for precious metals given the increased opportunity cost associated with unprofitable assets. Spot prices rebounded north of the $ 23.00 an ounce level in recent trading after finding support at $ 22.60 late in Europe this morning. Buyers came before last week’s low of $ 22.60 and the 21-day moving average of $ 22.55. Short-term silver bulls will now watch a test of recent highs around the $ 23.40 area, which also happens to coincide with the 50DMA at $ 23.39.

Silver and other precious metals (like gold) gained ground on Tuesday as they took advantage of dollar weakness (the USD is lower against all G10 currencies except the euro and yen, which keep the DXY flat). US data appeared to have weighed on the dollar on Tuesday after the ISM manufacturing survey showed a slowdown in activity in December and inflationary pressures as a result of significantly easing supply chain problems. Meanwhile, the JOLTs Job Opening headline fell short of expectations and there seems to be some bets to suggest that participants are betting that this will ease pressure on the Fed to tighten so aggressively this year.

However, the JOLTs survey found a record number of people who quit their jobs in November, which is considered to be one of the best indicators of a hot job market (people are confident they can do it “better” than their current job). Meanwhile, the most reluctant (historically) Fed member, Neil Kashkari, said he now sees two rate hikes in 2022, as not long ago he wanted the Fed to wait until 2024 to hike rates. Real-world returns seem to be getting the message that economic conditions still warrant some tightening by the Fed, despite today’s minor data failures, and the Fed appears eager to comply.

TIPS 10-year yields are above -0.95% on Tuesday after rising below -1.10% just last Friday as traders bet on higher long-term rates (closer to long-term inflation), as economic optimism prevails over Omicron-related pessimism. In fact, at this stage it seems very good that Omicron is significantly milder than previous varieties and the economic damage that comes with it is far less. The rally in real yields suggests that Tuesday’s silver and gold rally could prove to be nothing more than a dead rebound. If the Fed’s tightening coupled with a strong US economy in 2022 pushes nominal 10-year yields above 2.0% but keeps inflation expectations in check in the mid-2% range, it means the 10- annual real returns go back towards 0.0%. This indicates a significant downward trend for precious metals like silver from current levels. Medium-term bears will be looking for XAG / USD in the coming weeks to test recent lows at $ 21.00.

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