Silver Price Analysis: XAG/USD tumbles to print fresh multi-month lows under $21.80 post-hot US PPI report

• Spot silver prices tumbled to print fresh multi-month lows under $21.80 amid a sharp pullback from session highs above $22.20.
• Silver was hit by a hot US PPI report, which showed prices rising 9.6% YoY versus expectations for 9.2%.

Spot silver (XAG/USD) prices tumbled to print fresh multi-month lows under $21.80 on Tuesday, amid a sharp pullback from earlier session highs above $22.20 in wake of a hotter than expected US Producer Price Inflation (PPI) report. At current levels in the $21.80s, XAG/USD is down more than 2.0%. That takes the precious metal’s losses on the month to nearly 5.0%.

Spot prices have been in a pattern of posting lower highs and lower lows since mid-November, during which time spot prices have dropped back from highs near $25.50 to current levels, a near 15% drawdown. Weighing on prices has been a broadly strengthening dollar (though the DXY has been consolidating for the past two weeks) and a build-up in expectations that the Fed will fight the current surge in inflation being felt in the US economy by tightening monetary policy sooner rather than later.

That is why silver was hit by Tuesday’s PPI report, which showed headline factory gate price inflation in the US hitting 9.6% YoY, well above expectations for a 9.2% reading. The latest numbers pile further pressure onto the Fed to act and act they are expected to do at Wednesday’s policy announcement. Markets expect the bank to announce a doubling of the pace of its QE taper to $30B per month from the current $15B per month pace, which would see net QE buying end by March, and for the bank’s new dot plot to point to multiple hikes in 2022.

Aside from Wednesday’s Fed meeting, there is also the release of the November Retail Sales report and the December NY Fed survey earlier in the session that will be worth keeping an eye on. Then, on Thursday, after the ECB, BoE, SNB and Norges Bank all set policy, US weekly jobless claims figures and the December Philly Fed survey will be released.

As far as this week’s US data is concerned, expectations are for the data to reflect a strong US economy that has picked up pace into the year’s end, though is still struggling with supply-side imbalances and high inflation, a story which argues in favour of Fed tightening. Clearly, precious metals like silver and gold face futher downside risks as the week draws on.