Silver Price Analysis: XAG/USD trading comfortably above $23.00, within recent ranges pre-FOMC minutes

• Silver is trading with modest gains ahead of the release of what are expected to be hawkish leaning FOMC minutes.
• XAG/USD currently trading just above the $23.00 level, up about 0.4% or about 8 cents on the day.
• Silver’s resilience in the face of higher real yields has been surprising, but may not last.

Spot silver (XAG/USD) prices are trading with modest gains in the run-up to the release of what is widely expected to be hawkish leaning FOMC minutes release at 1900GMT. Prices are currently trading just above the $23.00 level, up about 0.4% or about 8 cents on the day and slightly above the midpoint of the $22.60-$23.40ish range that has prevailed over the past two weeks.

Silver’s resilience in the face of a sharp rise in US real yields, which is typically a negative for precious metals, has been surprising. 10-year TIPS yields (the 10-year nominal yield minus inflation expectations) is currently probing two-month highs near-0.9% and is up a further 3bps on the day, taking its on the week gains to about 17bps. Tuesday’s ISM Manufacturing PMI survey saw the prices paid subindex fall dramatically, a sign that peak levels of (MoM) inflation in the US might be in.

That raises the chance that the Fed’s inflation forecasts for 2.6% in 2022 and then closer to 2.0% in the subsequent years (which have been criticised by many as understating inflation risks) may prove correct. 10-year yields at current levels just abov 1.65%, though sharply up on the week (with the upside driven by real yields), suggest that bond markets see the Fed’s rate projections as overly optimistic.

But optimism has been growing in markets as of late regarding the prospects for continued strong economic growth into 2022 and beyond amid strong consumer demand, tight labour markets (as Tuesday’s JOLTs report and Wednesday’s ADP numbers emphasises). There is a risk that markets increasingly start to believe the Fed’s dot plot, which suggests rates will reach 2.1% by the end of 2024, before reaching 2.5% in the long run.

10-year break-even inflation expectations remain stable in the 2.50% area and if the Fed is right (about a stronger long-term growth than markets expect, but lower inflation than many fear) that suggests it should remain stable. But if they are right about the strong economy, that means long-term nominal yields will need to move higher. That means real yields (nominal yields minus inflation expectations) will need to move higher as well.

A move back towards 0% in the 10-year TIPS yield would be a massive tailwind for silver and other precious metals. Traders betting on such a long-term outcome (which would likely take at least a year to unfold in full), would likely expect to see XAG/USD drop under support in the mid-$21.00s and to pre-pandemic levels in the upper teens.