Silver Price Analysis: XAU/USD reclaims $23.00 level amid choppy, pre-year-end trading conditions

• Spot silver prices have been choppy over the last few days, swinging between an 80 cents $22.60 to $23.40ish range.
• XAG/USD has recovered back above $23.00 on Thursday, putting on course for a 1.0% monthly gain but 12% annual loss.
• XAG/USD traders should keep their eyes on inflation expectations and real yields in 2022 as the Fed pivots hawkishly.

Spot silver (XAG/USD) prices have been choppy over the last few days, swinging between an 80 cents $22.60 to $23.40ish range in low liquidity/volume trading conditions. Right now, spot prices are trading slightly to the north of the $23.00 level again for an on-the-day gain of just over 1.0%. That means XAG/USD should end the month also about 1.0% higher, having recovered more than 7.5% from early monthly lows in the $21.50 area after spot prices found strong support at the late September (and annual) lows. On the year and with one trading session to go, spot silver prices are on course to post losses of slightly more than 12.0%.

Back to spot silver’s price action over the past few days; the confusing moves seem to have taken their cue from bond market developments. Real yields have been falling throughout the week, with 5-year TIPS now under -1.60% having begun the week above -1.50%, which has ultimately offer spot silver and other precious metals support. But nominal yields have been choppy, with the 5-year jumping as high as 1.31% on Wednesday from beginning the week under 1.25%, which coincided with silver prices pulling back from Tuesday’s $23.40 highs to Wednesday’s $22.60 lows. Nominal yields have since backed off, with the 5-year back around 1.27% and this has helped silver recover to current levels above $23.00.

The divergence between nominal (rising on the week) and real yields (falling sharply on the week) has seen break-even inflation expectations surge. 5-year breakevens began the week around 2.75% but have surged to close to 2.90%, the highest since 9 December. Whether this translates into a more lasting upturn and a challenge of November highs in the 3.30% area over the course of Q1 2022 remains to be seen, but could be a source of support for precious metals like silver which are seen as an inflation hedge.

With it seeming increasingly likely that the Fed is going to start its rate hiking cycle in March or, at the latest, May, this may be enough to keep inflation expectations in check, so long as markets believe a proactive Fed will squash inflation. If inflation expectations do fall back from current levels and perhaps head back towards Q2/3 2021 lows in the 2.40% area, this could put upwards pressure on real yields. Given the negative correlation between real yields (seen as a proxy for “opportunity cost”) and non-yielding precious metals, this would present an important headwind. Spot silver’s major patter in 2021 was lower highs followed by lower lows and it seems likely this will continue into 2022, which could see XAG/USD drop under key support in the $21.00s zone.