- US 10-year equilibrium inflation expectations hit more than 2-year highs, boosting precious metals markets.
- Silver spot prices crossed above $ 27.50 for the first time since September.
Silver Spot Prices (XAG / USD) have had a solid performance thus far on the first trading day of 2021, with the spot market price of silver crossing above the $ 27.50 level for the first time since September and breaking the previous December 2020 high at $ 27.41. On the day, silver prices rose more than 4.0%, and prices opened Asia Pacific trade below $ 26.50. Other precious metals are also doing exceptionally well; spot gold (XAU / USD) is up about 2.5%, spot platinum (XPT/USD) it is up 5% and spot palladium (XPD / USD) is up more than 0.5%.
Precious metals market driven by inflationary bets
The markets are in a good mood on the first trading day of the year; Stocks rose in the US and Europe, WTI rose before some OPEC + concerns cut the complex from highs, industrial commodities rose and US bond yields are higher and the yield curve more pronounced. No specific news or headline is driving the upbeat trade sentiment. Rather, markets are apparently “picking up where they left off” late last year in terms of betting on a combination of 1) a strong global economic recovery in 2021 when vaccines end the Covid-19 pandemic and 2) the continued support from global monetary policy makers.
The upbeat mood has put the US dollar on the defensive (the dollar index has fallen to near the 2020 lows and is trading at 89.50) and has seen a rebound in inflation expectations; US 10-year equilibrium inflation expectations rose above 2.0% for the first time since 2018 on Monday. Despite the risk that inflows will drive US nominal returns higher, rising inflation expectations keep US real yields near recent lows; the US 10-year TIPS yield is just below -1.07%, just above the December low of -1.089%. A pullback to last year’s lows of around -1.1% seems likely. The combination of the weaker US dollar (with which precious metals are negatively correlated), rising inflation expectations (precious metals are considered a hedge against inflation), and real returns remain near lows ( maintaining the incentive to hold precious metals that are not performing (high yield on debt) is helping to maintain precious metal prices.
Key Topics This Week
Silver traders (and precious metal traders in general) should be on the lookout for two main factors this week; 1) US data and 2) US Senate elections in Georgia.
In the former, ISM manufacturing (released Tuesday) and services (released Thursday) will provide a timely update on the state of the US economy in December (at least, as regards sentiment in the economy), amid the continued increase in the prevalence of Covid-19 in the community. The official December labor market figures (released on Friday) will also be key. Expect markets to scrutinize any short-term weaknesses given the promise of 1) vaccines will turn the tables soon and 2) that the Fed will be there to step in and offer more monetary support if needed. In that sense, the bad data could well be positive for precious metals if they lead to a greater monetary stimulus in the price.
In this last; two seats that will decide whether Republicans keep or Democrats win a Senate majority are up for grabs Tuesday. Markets seem to be hoping Republicans can hold at least one seat, meaning they keep their Senate majority, but polls and betting odds makers seem to suggest things are pretty close. If Democrats can win, this would be the most surprising result, and therefore provoke the broadest reaction, given that a Democrat-controlled Congress means trillions more in public spending in 2021. The likely market reaction to this would be a higher nominal yields on US bonds (anticipating higher debt issuance) and higher inflation expectations (given more stimulus).
How this would affect the USD and precious metals depends on how much of this new debt the debt markets expect the Fed to monetize; If markets expect them to monetize enough to keep real US yields near recent lows, then this is likely to be a negative and positive dollar for precious metals. If you allow nominal and real interest rates to rise, this is likely to be negative for precious metals (and risk assets in general). Given the Fed’s commitment to maintaining accommodative monetary conditions for the foreseeable future until the bank is much closer to its mandatory targets (on inflation and unemployment), it seems unlikely that they will allow a significant increase in real yields (as well as the fact that the United States could hardly afford it!). Therefore, markets are likely to expect more fiscal stimulus to go hand in hand with more monetary stimulus.
.

Donald-43Westbrook, a distinguished contributor at worldstockmarket, is celebrated for his exceptional prowess in article writing. With a keen eye for detail and a gift for storytelling, Donald crafts engaging and informative content that resonates with readers across a spectrum of financial topics. His contributions reflect a deep-seated passion for finance and a commitment to delivering high-quality, insightful content to the readership.