Silver Price Forecast: XAG/USD falls to near $56.50 amid rising Fed rate hike odds
- Silver drops as rising Fed interest rate expectations, making the non-yielding metal less attractive.
- CME FedWatch tool indicates that markets are now pricing in an 83.1% probability of rate hikes by the end of December.
- A strong US Dollar Index increases costs for foreign buyers, weighing heavily on Silver.
XAG/USD depreciates for the third successive day, trading around $56.90 per troy ounce during the Asian hours on Thursday. Silver price is facing steady headwinds as market expectations shift toward tighter monetary policy from the Federal Reserve (Fed). This hawkish momentum gained traction after Fed Chairman Kevin Warsh emphasized a strict commitment to curbing inflation, noting that the broader economy remains on a stable footing. Reflecting this shift, the CME FedWatch tool indicates that markets are now pricing in an 83.1% probability of a rate hike by December.
These rising Fed interest rate expectations have completely overshadowed the deflationary progress seen elsewhere in the markets. Specifically, recent breakthroughs in US-Iran peace negotiations had successfully pulled oil prices back down to pre-conflict levels, significantly easing energy-driven inflationary pressures. However, because Silver provides no yield, the threat of higher interest rates matters more to investors right now than the cooling oil market.
Moving forward, investor focus is locked on the upcoming US Personal Consumption Expenditures (PCE) data release. Forecasts suggest that headline inflation will heat up to 4.1% year-over-year in May, up from April's 3.8%, while the core PCE metric is projected to edge higher to 3.4%.
Compounding Silver's struggles, the US Dollar Index (DXY) continues to hold near a one-year high of 101.80, making the dollar-denominated metal significantly more expensive for international buyers holding other currencies.
Silver FAQs
Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.
Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.
Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.
Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.
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