Silver attempts cautious rebound ahead of closely watched Fed decision
- Silver edges higher on Tuesday after recently coming under pressure from rising bond yields.
- Investors limit their exposure ahead of Wednesday’s monetary policy decision.
- Higher energy prices fuel inflation concerns and reinforce expectations of tighter monetary policy.
Silver (XAG/USD) trades around $63.40 on Tuesday at the time of writing, up 0.28% on the day. The white metal attempts to stabilize as investors refrain from taking large positions ahead of the United States (US) Federal Reserve (Fed) monetary policy decision on Wednesday.
Silver continues to face a challenging environment due to a firm US Dollar (USD) and elevated US Treasury yields. Higher yields increase the opportunity cost of holding non-yielding assets such as precious metals and could therefore limit attempts by XAG/USD to extend its recovery.
Bond yields are also rising across several major economies as the energy shock caused by the war in the Middle East revives inflation concerns. Higher Oil prices are making the task more difficult for central banks seeking to bring inflation sustainably back toward their targets.
In the United States, the Consumer Price Index (CPI) rose 3.4% YoY in August, while the Producer Price Index (PPI) accelerated to 5.4% from 4.8% in July. These figures, combined with recent Fed communication emphasizing the need to contain inflationary pressures, reinforce expectations of an interest rate hike on Wednesday.
Much of the risk surrounding a hawkish Fed decision, however, appears to be already priced in. Investors’ attention is therefore likely to focus primarily on the central bank’s updated economic projections and comments from Fed Chair Kevin Warsh regarding the future path of interest rates.
Silver could remain under pressure if the Fed signals that a September rate hike marks the beginning of a more sustained tightening cycle. Such a scenario could push US Treasury yields higher and support the US Dollar, two factors that are generally negative for the white metal.
Conversely, a less hawkish-than-expected message could offer some relief to Silver, particularly if it triggers a decline in bond yields and the US Dollar. The market therefore remains particularly sensitive to any guidance the Fed provides regarding its upcoming policy decisions.
Beyond monetary policy, the rise in global bond yields also reflects increasing government financing needs and concerns over fiscal sustainability. Over the longer term, these worries could support demand for precious metals as alternatives to sovereign assets, although the interest rate outlook remains the main driver for Silver for now.
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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