Silver Price Analysis: XAG/USD rallies for sixth successive session amid more demand for inflation protection

• Silver is on course for a sixth successive session of gains amid ongoing demand for inflation protection.
• XAG/USD bulls are eyeing a test of late March highs at $25.85 and a push towards annual highs near $27.00.

US yields, particularly at the front end of the curve, are falling on Wednesday, even though just released Producer Price Inflation data showed a fresh spike in inflationary pressures, and this, combined with demand for inflation protection, is helping precious metals gain ground. Spot silver (XAG/USD) bulls have their sights set on a test of late March highs in the $25.80s per troy ounce area, a break above which could open the door to a run above $26.00 and to annual highs near $27.00.

At current levels in the $25.60s, XAG/USD is trading higher by about 1.0% on the day, taking on the week gains to nearly 3.5%, with the precious metal on course for a sixth successive session of gains. For now, the demand for protection against inflation which continues to heat up (see the latest UK and US CPI and PPI numbers) is outweighing concerns about tighter monetary policy.

Indeed, the recent push higher may suggest that investors don’t deem the Fed’s stance as sufficiently hawkish to prevent a prolonged spike in inflation. But further hawkish policy shifts remain a downside risk to the precious metal, if further substantial upside in bond yields is triggered.

St Louis Fed President James Bullard is calling for the Fed to take interest rates into decisively contractionary territory (i.e. well above the neutral rate at 2.0-2.5%) to combat inflation, and if there is growing evidence of other members coming around to this view, yields could rocket yet further higher, weighing heavily on silver. Traders should caution against chasing silver higher, in other words.