Silver price rebounds on softer Oil but Fed tightening caps recovery
- Silver advances 1.87% on Thursday, recovering previous day's losses.
- Lower Oil prices ease inflation concerns and provide support to precious metals.
- The Fed's rate hike and prospects of further tightening this year could limit the rebound.
Silver (XAG/USD) rebounds on Thursday and trades around $64.15 at the time of writing, up 1.87% on the day. The white metal benefits mainly from the pullback in Oil prices, which helps ease concerns about a renewed acceleration in inflationary pressures.
Tensions in the energy market ease following the recent sharp rise in crude Oil prices. Saudi Arabia is reportedly seeking to increase Oil deliveries to Asian refiners through ship-to-ship transfers off Oman's Sohar port, according to the Times of India. The alternative could help limit supply disruptions after drone attacks damaged Saudi Arabia's East-West pipeline.
The decline in Oil prices supports Silver by reducing the risk that the recent surge in energy costs will keep inflation elevated for longer. The prospect of softer price pressures could also limit the upside in bond yields, generally providing a more favorable environment for non-yielding precious metals.
However, Silver's upside potential remains constrained by tighter US monetary policy. The Federal Reserve (Fed) raised its benchmark interest rate by 25 basis points on Wednesday to a target range of 3.75%-4%, in line with expectations. The move marks the US central bank's first interest rate increase in three years.
Fed Chair Kevin Warsh justified the decision by pointing to inflation that remains too high and the strength of the US economy. The latest projections from policymakers also indicate that another interest rate increase remains on the table this year, potentially maintaining pressure on non-yielding assets such as Silver.
Money markets currently price in around a 55% chance of another rate hike at the October meeting, according to the CME FedWatch tool. Meanwhile, the benchmark 10-year US Treasury yield remains close to the 5% level, which could limit the extent of Silver's recovery despite the easing pressure from Oil prices.
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.