Gold and silver fell further this morning, once again ignoring everything else but those bond yields. As yields continue to rise so do the opportunity cost of holding non-interest-bearing assets like gold. Gold in particular needs bond yields to start dropping back or the dollar to weaken sharply for it to find some support. The weak ISM services PMI has caused the dollar to ease back, so let’s see if gold will catch a bid later on in the session. Silver on the other hand is also an industrial metal, making it more sensitive to the economy. With ongoing expectations over a strong global economic rebound driving other commodities higher, silver is likely to outperform gold if those expectations are met. This means that it will either fall at a slower pace than gold, or rise at faster clip.
Weak service PMI could hurt dollar
The services sector is the largest in the US economy and with PMI dropping by 3.4 points in February is not something the dollar bulls would have liked to see. In fact, looking at the details of the report makes for a grim picture.
- Headline PMI: 55.3 vs 58.7 expected and 58.7
- Business activity fell to 55.5 vs 59.9 previous
- Employment fell to 52.7 vs 55.2 previous
- New orders fell to 51.9 vs 61.8 previous
- Prices paid rose to 71.8 vs 64.2 previous
The key takeaway points from the details of the PMI report are that employment rose but slowly, while there are more signs of inflation with prices paid rising. Overall, it was a weak report and this should help slow the rise in bond yields.
Yields rally likely to slow
Indeed, the focus remains firmly fixated on yields. The last two weeks of February saw stocks fall back from record highs as bond yields jumped in anticipation of a strong economic rebound and reduction in the pace of asset purchases by central banks. However, other risk assets such as crude oil pushed higher on expectations of stronger demand. As we head towards the latter parts of this first quarter, rising yields vs. optimism about re-opening of major economies will be the key theme for the markets.
I think yields will soon stop going higher as central banks are still printing at full throttle and there is the possibility that the world economy will not rebound as fast as some expect. This means that loose central bank policy will be here for a long time.
Silver outlook bullish
As such, I still expect precious metals will recover but I am more bullish on silver than gold because with the world recovery demand for industrial materials should rise proportionally. In the long term, silver is likely to find significant demand from the renewable energy sector (solar panels) and electric vehicles.
Silver at critical juncture
Obviously timing is everything but with silver testing THIS bullish trend line and key support around $26, it is possible that the metal could rebound from here:
Source: ThinkMarkets and TradingView.com
A nice hammer-like candle was already printed here on Tuesday, but we need to see this level hold today and for price to make a short-term higher high to provide more conviction.
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