Trifecta of drivers supporting silver

Yield-curve control locks the nominal yield at a certain maturity at a certain level above which the central bank steps in and buy whatever bonds are on offer in order to prevent yields from rising any further. Such a development would make fixed income investments utter useless as a safe haven asset, especially into a period where inflation is expected to make a comeback. Not only due to the massive amount of liquidity that central banks have provided but also due to unprecedented government stimulus creating the political need for higher inflation to support rising debt levels.

The U.S. bond market has since April behaved as if yield-curve control was already in operation. While the yield on U.S. ten-year Notes (above chart) have been anchored within a relatively tight range between 70 and 80 bp, the real yield and breakeven have moved in opposite directions. A development supporting the fundamental investment case for holding precious metals in a balanced portfolio.

Following another shallow correction gold is once again testing the upside. The chart highlights a market in need of a deeper correction and a longer period of consolidation. So far however, the underlying investment demand has been strong enough to prevent this from happening. Demand for bullion-backed ETF’s remain firm with total holdings continuing to reach fresh record highs.

Following the March collapse, silver has now completed a dramatic V-shaped recovery to take aim at the next level of resistance at $19.65, the 2019 high. In the process the gold-silver ratio has dropped to 93.7 (ounces of silver to one ounce of gold), the lowest since February. The current triple support from rising gold, rising industrial metals and a weaker dollar could see silver attempt to further reduce its cheapness to gold, currently some 16% below the five-year average.