Silver rebounds, but Fed rate-hike threat hangs over the metal
- Silver gains 0.40% on Monday after falling sharply late last week.
- Expectations of a September rate hike remain a major headwind for the non-yielding metal.
- Renewed tensions between the United States and Iran support safe-haven demand but also fuel inflation risks.
Silver (XAG/USD) rebounds on Monday and trades around $66.70 at the time of writing, up 0.40% on the day. The main obstacle to a stronger recovery in Silver remains the shift in expectations surrounding the Federal Reserve’s (Fed) monetary policy. Fed Chair Kevin Warsh struck a more hawkish tone on Friday at the Jackson Hole Symposium, stressing that policymakers still have “work to do” if underlying inflationary pressures fail to ease sufficiently.
These comments prompted investors to significantly raise expectations for monetary tightening. According to the CME FedWatch tool, markets now see around a 61% chance of a 25-basis-point interest rate hike at the September meeting, compared with roughly 35% before Warsh’s speech. The prospect of higher interest rates for longer could weigh on Silver, which offers no yield.
The white metal nevertheless benefits from a modest pullback in the US Dollar (USD), helping support Monday’s rebound. After strengthening on Friday as markets reassessed the Fed’s rate outlook, the Greenback loses some momentum, providing some relief to precious metals denominated in US Dollars.
Geopolitical tensions in the Middle East also provide support to Silver by boosting demand for safe-haven assets. The United States (US) and Iran exchange fresh strikes after more than a month of a fragile truce. US forces attacked Iranian facilities on Larak Island on Sunday, while Tehran subsequently said it had targeted US military facilities in Jordan and the United Arab Emirates (UAE).
The escalation, however, has a mixed impact on Silver. Higher Oil prices amid mounting tensions in the Middle East increase inflation risks and could reinforce the Fed’s case for maintaining a restrictive monetary policy stance, which is a negative factor for non-yielding metals.
Attention now turns to upcoming US economic data, including the Institute for Supply Management (ISM) surveys and Friday’s August Nonfarm Payrolls (NFP) report. Persistent signs of weakness in the labor market could temper expectations for higher interest rates and support Silver, while strong data or renewed inflationary pressures could reinforce the case for monetary tightening in September.
US data in focus as Fed shifts gaze from jobs to inflation
Analysts at Rabobank highlight a busy US data slate, starting with the July JOLTS report. They note that “normally not a market mover, it could nevertheless shed more light on the recent slowdown in job growth,” offering additional context ahead of the main labour-market release later in the week.
Turning to activity indicators, Rabobank points out that “only a small fall in the US ISM manufacturing survey for August (as per the consensus) could be interpreted by the market as a sign that US, as well as global, manufacturing activity is recovering despite ongoing concerns over tensions in the Middle East.”
The bank underscores that “the US nonfarm payrolls and unemployment figures are the highlight of the day,” with “the street forecasts net job creation of 55,000 in August, following an unexpected dip in July.” However, they caution that “although the jobs report is always a market mover, Fed Chair Warsh’s comments at Jackson Hole suggest the Fed’s focus is now on the near-term path for inflation rather than the labour market,” potentially tempering the policy implications of any surprise in the headline numbers.
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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