Silver Price Forecast: XAG/USD rises to near $57.50 despite rising inflation concerns

Silver prices may depreciate amid rising expectations of tighter monetary policy.
Markets price in roughly a 94% probability of a Fed rate hike in December.
Fed’s Ueda signaled the possibility of further monetary tightening.

Silver price (XAG/USD) gains ground for the second successive day, trading around $57.40 per troy ounce during Asian hours on Tuesday. However, Silver prices may fall as elevated oil prices heighten inflation concerns and reinforce expectations of tighter monetary policy.

Oil jumps on Strait of Hormuz shipping attacks

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Analysts at Rabobank report that oil prices “surged following further reports of attacks on shipping in the Strait of Hormuz,” after Iran claimed that “two tankers carrying up to 4 million barrels of crude were struck by marine mines.” The bank notes that the incident has sharply heightened geopolitical risk premia in the energy complex, reinforcing concerns over the security of key Middle East supply routes.

Silver also faces pressure from a stronger US dollar and rising bond yields. Oil prices remained firm amid ongoing hostilities in the Middle East and Eastern Europe, while Iran continued to assert its control over the Strait of Hormuz.

Meanwhile, the US Federal Reserve is widely expected to keep interest rates unchanged next week, with markets pricing in roughly a 94% probability of a rate hike in December. Elsewhere, the European Central Bank is expected to implement at least one additional 25-basis-point rate increase this year to address persistent inflationary pressures. Bank of Japan Governor Kazuo Ueda also noted that underlying inflation was “quite close” to the central bank’s 2% target, signaling the possibility of further monetary tightening.

Analysts at Scotiabank observe that, despite the recent softening in the Dollar, "markets may be reluctant to chase the USD lower into the FOMC at the end of the month." They add that the shift in rate expectations has eroded some of the currency’s yield advantage, noting that "reduced yield support may leave the USD prone to more weakness ahead," even if investors remain cautious about extending bearish positions immediately before the upcoming Fed meeting.

Silver FAQs

Why do people invest in Silver?

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.

Which factors influence Silver prices?

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.

How does industrial demand affect Silver 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.

How do Silver prices react to Gold’s moves?

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.