Silver price (XAG/USD) trades around $30.80 per troy ounce during Tuesday’s European hours, maintaining its position near a two-month high of $31.09, marked on Monday. Silver price is gaining ground due to rising expectations of a significant 50 basis points rate cut by the Federal Reserve on Wednesday.
As a non-yielding commodity asset, Silver becomes more attractive to investors in a lower interest rate environment, where the opportunity cost of holding it decreases, potentially offering better returns compared to other assets.
According to the CME FedWatch Tool, markets are pricing in a 33.0% chance of a 25 basis point Federal Reserve interest rate cut at the September meeting, while the probability of a 50 basis point cut has surged to 67.0%, up from 50.0% just a day earlier. This shift reflects heightened anticipation of more aggressive monetary easing.
The US Dollar (USD) faces challenges due to lower Treasury yields. The US Dollar Index (DXY), which measures the value of the US Dollar against its six other major peers, trading around 100.60 with 2-year and 10-year standing at 3.55% and 3.61%, respectively, at the time of writing.
Silver, being a dollar-denominated commodity, becomes more affordable for buyers using other currencies when the US Dollar weakens. This price advantage can help boost demand for the precious metal, as it becomes less expensive for international buyers to purchase.
However, demand for Silver could be negatively impacted due to disappointing economic data from China, raising concerns about consumption in the world's largest metals market. Over the weekend, data revealed that China's industrial output, retail sales, and fixed asset investments fell short of expectations for August.
Silver plays a crucial role in several industrial sectors, including electronics, solar panels, and automotive components. As one of the largest manufacturing hubs globally, China's industrial demand for silver is a key factor in the precious metal's overall consumption.
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.