What is XAG/USD?

XAG/USD is the exchange rate that shows the value of Silver against the US Dollar. You can also find Silver traded with other currencies like XAG/EUR or XAG/GBP. This exchange rate tells you how many US Dollars you need to buy one troy ounce of Silver. For example, if XAG/USD is trading at 18.70, it means that you need 18.70 US Dollars to buy one troy ounce of Silver. So, when the price is going up, Silver is said to be appreciating or getting stronger and vice versa when the price is going down.

What are the most important XAG/USD charts to follow?

The most important charts to follow for XAG/USD is the XAU/USD chart (which represents Gold) and the US Real Yield, which is the yield you get after adjusting for inflation expectations. Both Silver and Gold are precious metals, they are generally correlated, and they are considered risk-free assets. Below you can see the chart showing this correlation.

Chart displaying the correlation between XAG_USD and XAU_USD prices, as well as US Real Yield

What is less known is that they “compete” with another risk-free asset, which is the US Treasury Bond. Unlike precious metals though the US Treasury Bond also pays an interest. The interest the bond pays is called yield. The opportunity cost of holding a precious metal or a US Treasury Bond is given by the Real Yield. When real yields are expected to rise you will generally see XAG/USD going down and when real yields are expected to fall you will see XAG/USD rise.

So, precious metals have an inverse correlation to US real yields. These expectations come from various macro fundamentals but the most important one is the US Federal Reserve monetary policy. When the Fed begins a tightening cycle raising interest rates, real yields rise and XAG/USD falls. When the Fed begins a cutting cycle slashing interest rate, real yields fall, and XAG/USD rises. Below you can see the chart showing the inverse relationship between US real yields and silver price.

The chart displays the inverse relationship between the US real yields and silver price

Is XAG/USD a good pair to trade for beginners?

XAG/USD is basically a play on the expectation of where US real yields will go in the next 6/12 months. This makes it a relatively easy trade to identify as when you see the Fed starting to tighten monetary policy raising interest rates and thus real yields, then you can expect the XAG/USD price to fall as a consequence. The reverse is true when you see the Fed starting to cut interest rates which will make real yields to fall and the XAG/USD price to rise. So, if you want to make it easier to trade Silver, you want to focus on what the Federal Reserve is going to do and where US real yields will go. This will make the process simpler and give a good guide for your directional trades.

What session is best to trade the XAG/USD?

The best session to trade XAG/USD is during high liquidity times which comprises the European Session and the North American Session. That’s when you can see the most volume and action, and the spreads are tighter as a consequence of more liquidity. Moreover, since Silver is inversely correlated with US real yields, US economic reports that can influence the Federal Reserve actions going forward can have a big impact on the silver price. For example, let’s say that the inflation report (CPI) for US comes out much higher than expected. This will make the Fed to hike interest rates more, which will translate in higher real yields in the future and thus make the silver price to fall.

Is the XAG/USD an important pair?

XAG/USD pair is important for those wishing to capitalise on the actions of the Federal Reserve as the monetary policy course that the central bank will take will dictate the returns of Silver. You can look at Silver or Gold as pretty much the reflection of the expectations of future US real yields. Note though that the market is always forward looking, so the trends will remain intact unless the fundamentals will start to change and indicate a possible turning point in the Fed’s actions.

Will the XAG/USD go up or down?

In the current context of aggressive monetary tightening by the Federal Reserve, the XAG/USD price is more likely to continue on its downtrend. This is because the Fed wants higher real yields to make their monetary policy as restrictive as possible to fight a historically high inflation. As long as they stay the course, inflation expectations should remain anchored and even trend down, but as nominal yields rise due to the Fed tightening, real yields of course will keep on rising.

The Fed’s response though will cause a bad recession and we can’t even exclude some kind of black swan event as the market has been used to low inflation and interest rates for more than a decade and such a big shock may very well break something down the road. So, we may expect sometime in Q2 or Q3 inflation to coming back to the central bank target of 2% as growth is already slowing down and will slow down even more going forward. Once the market will see the Fed to cut interest rates to spur growth, XAG/USD should begin a new uptrend.

How important is inflation with regards to XAG/USD?

A common misconception is that Silver or Gold are inflation hedges, so when inflation is high the precious metals appreciate and when inflation is low the precious metals depreciate. It’s been demonstrated many times that this relationship is wrong, but if someone wants a great example, you can just look at what happened this year. Inflation is at 40 years high but Silver and Gold just kept on depreciating. In fact, what is important for XAG/USD is not actual inflation but expected inflation. This expected inflation can be seen through US real yields. When the Fed is tightening monetary policy, you can expect nominal yields to rise and inflation expectations to fall because tighter monetary conditions are disinflationary/deflationary. So, you will expect less inflation going forward. Remember that the market is forward looking, it prices in future expectations not what is happening in the present. On the other hand, when the Fed is easing monetary policy, you can expect nominal yields to fall and inflation expectations to rise because looser monetary conditions are purposely enacted to spur growth and increase inflation.

How has the Ukrainian war impacted XAG/USD?

When Russia invaded Ukraine the first reaction in the markets was a flight to safety. Bonds and precious metals were bought. That reaction soon revealed to be wrong footed. The market realised that inflation was already really high, and this war would have increased inflationary pressures on food and energy, making the market to expect even more rate hikes on the horizon. In fact, the first reaction made US real yields to fall (nominal yields down and inflation expectations up) and thus the price of Silver climbed. A couple of weeks later though the market started to price in the more aggressive monetary tightening that will following the months ahead and high real yields and from that point onwards, XAG/USD just kept on melting. From the peak on March 8th to the trough on September 1st, Silver lost more than 32%.

How to trade the XAG/USD?

The best way to trade in general is to have a fundamental idea for direction, which is generally based on macroeconomics such as central bank’s monetary policy, growth, inflation and so on, and technical analysis for risk management. For example, let’s say that you view the aggressive Fed as a headwind for XAG/USD. So, you will want to mainly take short positions. You also need to manage your risk though. Where can you enter in order to have a small risk exposure but a bigger profit potential? You can use technical analysis.

So, you open the XAG/USD chart and use technical concepts like support and resistance, trendlines, Fibonacci ratios, indicators and so on to decide where to open a trade. For example, in the chart below you can see how you could use the downward trendline with a previous swing level as resistance for extra confluence. You could place a stop loss above that strong area, so your loss would be little and limited. Your target could have been much more than that. This way you can risk a little to make more than a little.

Chart showing XAG_USD with a downward trendline acting as resistance

Where can I trade XAG/USD?

You can trade XAG/USD with a broker. Always choose a good, reputable, and regulated broker to avoid unnecessary problems. When you open a trading account with a broker, you will have to supply your KYC documents and, once approved, deposit money to be able to trade. Finally, you can use the broker trading platform to execute your trades. Most retail brokers let you also trade on MetaTrader 4 or MetaTrader 5, which are two of the most famous and popular trading platforms among retail traders. Most retail brokers offer CFD trading, although you can also trade XAG/USD via other derivatives like futures or options that trade on exchanges but are more expensive than CFDs. Moreover, you can invest in Silver via ETFs (Exchange Traded Fund) like for example the iShares Silver Trust (SLV).

XAG/USD correlation

Silver is correlated with Gold although sometimes you can see them decouple for other factors like supply and demand. You can see in the chart below how the general correlation is clear but while Gold has made a new all time high in 2020, Silver failed to do so.

Chart displaying the correlation between XAG_USD and XAU_USD prices, as well as US Real Yield

The other important inverse correlation you should know about is the one with US real yields. Precious metals “compete” with another risk-free asset, the US Treasury Bond. But while Silver doesn’t pay an interest to own (it actually has costs to store it), the US Treasury Bond pays an interest called yield. So, the opportunity cost of holding one of the two is given by the real yield. Real yield is nominal yield minus inflation expectations.

The chart displays the inverse relationship between the US real yields and silver price