Silver Slumps As US Senate Elections Raise US Bond Yields

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  • Silver prices spiked on Wednesday amid a choppy USD reaction to the Georgia Senate election.
  • Silver is currently trading lower in an environment of higher real and nominal US bond yields.
  • The Democrats managed an unexpected sweep of both Georgia Senate seats, giving them control over Congress.

Silver Spot Prices (XAG / USD) spiked on Wednesday, climbing to highs of $ 27.90 during the European morning (gains of up to 1.4% on the day at the time), before falling back to $ 27.30, where spot prices are now trading at losses of almost 1.0% or about 30 cents on the day.

The precious metal has apparently traded based on changes in US dollar sentiment; XAG / USD hit European morning highs when the Dollar Index (DXY) was at new multi-year lows at 89.20, but XAG / USD has since declined as DXY has rallied back to highs of the day at 89.65.

Democrats sweep Georgia, initial market reaction

The main talking point in the market this morning was the fact that Democrats managed to get a surprise sweep of the two available Senate seats in Tuesday’s Georgia election, giving them a majority in the Senate to go with their majority in the House, which means the party will now have control over Congress.

While the USD’s mixed reaction means the market remains undecided as to the long-term impact on the currency of further Democratic fiscal stimulus, rising nominal and real U.S. bond yields appear to have weighed on metals markets. precious, which are down across the board on Wednesday; US 10-year yields rose above 1.0% for the first time since February and the 10-year TIPS yield rose to -1.0% at one point. Higher bond yields tend to reduce the incentive to hold precious metals instead of bonds, hence some of the weakness seen today.

Long-term reaction

While the initial reaction in the precious metals markets appears to have focused on rising nominal and real bond yields, the long-term implications of a Democrat-controlled Congress remain debated.

Precious metals bears could argue that recent developments will turn out to be negative in the long run as increased US government borrowing will 1) continue to drive nominal and real US bond yields, 2 ) will foster a faster economic recovery in 2021 that will reduce the demand for safe havens (such as silver and gold) and 3) result in a less dovish Fed on how the government is doing more of the “heavy lifting” with regard to encouraging economic recovery after Covid-19. Furthermore, bears could argue that a faster US recovery as a result of higher government spending will be a long-term positive for the USD weighing on USD negatively correlated assets such as precious metals.

The bulls could counter these arguments by saying that while nominal US bond yields could rise as a result of increased borrowing, real yields are likely to remain near recent lows given 1) the fact that expectations for stimulus are raising inflation expectations (indeed, 10 break-even points for the year rose to 2.05% on Wednesday, above the low of 1.9% at the end of 2020) and 2) expectations that the The Fed will maintain a loose monetary policy for at least the next two years. In fact, the 10-year TIPS yield quickly reversed most of its rally to -1.0% and is now trading around -1.06%. If both factors keep real yields low, this should support precious metals, which thrived in 2020 when real US yields slumped below 0.0%.

Returning to the already mentioned increase in inflation expectations; If breakeven points continue to rally, this in itself is likely to be a positive precious metal given silver and gold’s status as long-term inflation hedges and stores of value. For many analysts, a Democratic sweep of the Senate majority is unlikely to change their bullish thesis.

For others, it might even strengthen it; a Congress controlled by Democrats means more fiscal largesse, which means more pressure on the Fed to maintain accommodative monetary conditions in order to ensure the solvency of the government, which means greater inflationary pressures in the long run. It all sounds pretty optimistic in the long run for the likes of silver!

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