XAU / USD hits $ 23.00 level amid troubled trading conditions ahead of year-end

• Spot silver prices have been choppy for the past few days, fluctuating between a range of 80 cents between $ 22.60 and $ 23.40.
• XAG / USD bounced back above $ 23.00 on Thursday and is heading for a monthly gain of 1.0% but an annual loss of 12%.
• XAG / USD traders should keep an eye on inflation expectations and real returns in 2022 as the Fed turns restrictive.

Spot silver prices (XAG / USD) have been choppy for the past few days, fluctuating between a range of 80 cents between USD 22.60 and USD 23.40 with low liquidity / trading volume. At the moment, spot prices are trading slightly north of the USD 23.00 level again, representing a daily gain of just over 1.0%. That means XAG / USD should also end the month about 1.0% higher after rebounding more than 7.5% from early monthly lows in the $ 21.50 area after spot prices hit the Lows in late September (and year lows) found strong support. Over the course of the year and one trading session before the end, the spot silver prices will record price losses of a little more than 12.0%.

Back to the price trend of silver over the past few days; the confusing movements seem to be based on developments in the bond market. Real returns have fallen over the week with the 5-year TIPS now below -1.60% while starting the week above -1.50%, ultimately providing support for silver and other precious metals. But nominal returns have been bumpy, with 5-year returns climbing 1.31% to below 1.25% on Wednesday from the beginning of the week, with silver prices falling from Tuesday’s $ 23.40 high coincided with Wednesday’s $ 22.60 lows. Nominal returns have since declined, with the 5-year decline being around 1.27%, and this has helped silver rebound to current levels of over $ 23.00.

The divergence between nominal (rising during the week) and real (falling sharply during the week) yields has led to a rise in break-even inflation expectations. The 5-year breakevens started the week at 2.75% but climbed to nearly 2.90%, the highest level since December 9th. Whether this will result in a more sustained rebound and challenge November highs in the 3.30% area over the course of Q1 2022 remains to be seen, but it could be a source of support for precious metals like silver, which are seen as a hedge against inflation.

With the increasing likelihood of the Fed starting its rate hike cycle in March or May at the latest, that might be enough to keep inflation expectations in check as long as markets believe that a proactive Fed will curb inflation. Should the inflation expectations fall back from the current level and perhaps again in the direction of the lows in the 2nd / 3rd. Given the negative correlation between real returns (as a proxy for “opportunity costs”) and non-profitable precious metals, this would be a major headwind. The main pattern of spot silver in 2021 was lower highs followed by lower lows, and it seems likely that this will continue through 2022, which could result in XAG / USD falling below key support in the 21, 00 USD falls.