Silver ETFs lost their luster Monday as the U.S. dollar rallied to its highest level in over three months and yields on benchmark U.S. Treasuries push toward 3 percent.
On Monday, the iShares Silver Trust (NYSEArca: SLV) and ETFS Physical Silver Shares (NYSEArca: SIVR) both dropped 2.9% and fell below their 200-day simple moving averages. Meanwhile, Comex silver futures were down 3.2% to $16.6 per ounce.
Dragging on silver and precious metals, the U.S. dollar rallied to a seven-week high after a rise in the yield on 10-year U.S. Treasuries to within a hair of the psychologically important 3.0% level – a strong USD makes dollar-denominated precious metals like silver costlier to foreign buyers and raises the opportunity cost of holding non-yielding assets like commodities.
“The entire market is watching that rates move and if we manage to break and extend higher the dollar will follow,” Brad Bechtel, global head of FX at Jefferies, said in a note, Bloomberg reports. “If we fail and resume lower again the dollar will likely follow that too.”
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However, yields were are rising in response to inflation concerns. If inflation increases, silver and other physical assets may provide a hedge or safeguard purchasing power.
TD Securities has also pointed out that the silver market may currently be too bearish and may produce potential upside, especially if industrial demand improves and forces short sellers to cover their trades.
“With money-manager positioning still hovering around extreme lows, silver continues to reflect extremely bearish sentiment across the speculative community,” TDS told Kitco. “But while silver’s industrial luster gives it a boost and as the precious-metals environment improves amid a flat yield curve, shorts could very well be forced to cover. In fact, with prices trading right below key resistance levels, price action in the coming weeks could lead to a sharp short-covering rally.”
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