Silver Price Forecast: XAG/USD dives to near $74 as Fed’s Kashkari warns of high inflation

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Silver price (XAG/USD) is down almost 3.5% to near $74.10 during the European trading session on Wednesday.

Silver price plummets 3.5% to near $74.10 as Fed officials warn of rising US inflation.
The Fed is unlikely to cut interest rates this year.
The US headline inflation has accelerated to 3.8% YoY in April.

Silver price (XAG/USD) is down almost 3.5% to near $74.10 during the European trading session on Wednesday. The white metal faces intense selling pressure as the focus of Federal Reserve (Fed) officials appears to be shifting towards elevated energy prices-driven high United States (US) inflation rather than weak labor market conditions.

Earlier in the day, Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari said that the major concern for the central bank now is higher US inflation than deteriorating labor market conditions; however, the central bank needs to pay attention to both.

Fed’s Kashkari added, “Most of the US data released since my dissent in April has shown inflationary risks are higher, not lower.” On the monetary policy outlook, Kashkari said, “The Fed should have a neutral policy outlook going forward.”

Higher oil prices due to the Middle East war have prompted US inflation. As measured by the Consumer Price Index (CPI), the US headline inflation for April came in at 3.8%, the highest level seen in almost three years.

According to the CME FedWatch tool, the odds of the Fed holding interest rates steady at their current levels this year are 52.3%, while the rest favor at least one interest rate hike this year. This is a sharp turnaround from two interest rate cuts anticipated before the onset of the war.

Theoretically, the scenario of hawkish Fed bets or persistent hold on interest rates bodes poorly for non-yielding assets, such as Silver.

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.