Silver rebounds on weaker US Dollar, but Fed hike risks cap recovery
- Silver rises 1.35% on Tuesday, supported by a weaker US Dollar and declining Treasury yields.
- Hopes of a diplomatic breakthrough between Washington and Tehran send Oil prices lower, despite conflicting reports.
- Persistent US inflation and expectations of a December interest rate hike by the Fed could limit Silver's recovery.
Silver (XAG/USD) rebounds on Tuesday, trading around $57.90 at the time of writing, up 1.35% on the day. The precious metal benefits from a weaker US Dollar (USD) and declining US Treasury yields, as reports of potential diplomatic progress between the United States (US) and Iran triggered a sharp retreat in Oil prices, before being disproved.
Israel's Channel 12 initially announced that a compromise proposal presented by Pakistan's army chief to Iranian officials has reportedly received preliminary approval from both Washington and Tehran. These developments raised hopes of a diplomatic breakthrough that could ease tensions in the Middle East and reduce disruptions to global energy supplies. However, a diplomat involved in the negotiations subsequently denied reports that an agreement was imminent, highlighting the uncertainty surrounding the discussions.
Oil prices reacted sharply to the initial reports, with West Texas Intermediate (WTI) Crude Oil retreating toward $97.40 at the time of press after briefly exceeding $100 earlier in the day. This decline reduces concerns about persistent energy-driven inflation, which has intensified since the outbreak of the conflict in late February.
The prospect of lower energy prices also puts downward pressure on US Treasury yields and the Greenback, creating a more favorable environment for non-yielding assets such as Silver.
However, the recovery in Silver could face headwinds from the Federal Reserve's (Fed) monetary policy outlook. Recent US inflation data have reinforced expectations that policymakers could raise interest rates again before the end of the year.
Both the Consumer Price Index (CPI) and Producer Price Index (PPI) for September exceeded market expectations, highlighting persistent inflationary pressures. Although the recent decline in Oil prices could alleviate some of these concerns, energy costs remain elevated compared with levels prevailing before the conflict.
According to the CME FedWatch Tool, traders currently assign a 17% chance to a rate hike at the October 27-28 Fed meeting, while the chance of an increase in December stands at approximately 92%.
Looking ahead, investors will focus on Thursday's Initial Jobless Claims and Friday's preliminary S&P Global Purchasing Managers Index (PMI) readings for October. With Fed officials observing their blackout period ahead of next week's monetary policy decision, these releases could influence expectations for future interest rate increases and determine whether Silver can extend its recovery.
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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