Silver rally underscores dominance of real yields over inflation

Silver prices have surged in recent sessions, driven by a decline in U.S. real Treasury yields rather than headline inflation trends, underscoring the metal’s sensitivity to interest rate expectations.

The spot silver price reached a two-month high of $28.50 per ounce on Tuesday, extending gains from the prior week as benchmark 10-year real yields fell to 1.65%, their lowest since early March. Analysts note that silver’s recent performance reflects its role as a non-yielding asset, where lower real rates reduce the opportunity cost of holding the metal compared to interest-bearing securities.

‘Silver is behaving like a classic rate-sensitive asset,’ said a strategist at a London-based commodities broker. ‘The market is pricing in a more dovish Federal Reserve path, which is compressing real yields and lifting precious metals.’

The rally contrasts with broader inflation data, which has remained sticky in the U.S. and Europe. Consumer prices in the U.S. rose 3.5% year-over-year in March, while core inflation held at 3.8%, defying expectations for a sharper slowdown. Despite this, silver has gained nearly 12% over the past month, outpacing gold’s 6% advance during the same period.

Traders attributed the divergence to the Federal Reserve’s signaled caution on rate cuts, with futures markets now pricing in just one 25-basis-point reduction in 2024, down from earlier projections of three or more. The shift has pushed real yields lower, making silver more attractive as a store of value.

‘The market is focusing on the real yield channel rather than nominal inflation,’ said another analyst. ‘Silver’s industrial demand is a secondary driver here, but the primary catalyst is the real-rate environment.’

The metal’s rally has also been supported by technical factors, with silver breaking above key moving averages and triggering fresh buying interest from momentum-driven funds. Open interest in silver futures has risen by 15% over the past two weeks, according to exchange data.

Looking ahead, analysts expect silver to remain range-bound between $26 and $30 per ounce in the near term, with downside limited by sustained real-yield compression. A sustained break above $30 could signal a shift toward $32, though upside may be capped by persistent macroeconomic uncertainty.

For now, the silver market’s focus remains squarely on real yields, reinforcing the metal’s reputation as a barometer for rate expectations rather than inflation alone.