Silver Price Forecast: XAG/USD turns upside down amid renewed Middle East hostilities

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Silver price (XAG/USD) surrenders its early gains and slides 0.73% to near $59.50 during the European trading session on Friday. The white metal turns negative amid fears that the next monetary policy move by the Federal Reserve (Fed) will be on the upside.

Silver price turns negative amid hopes that the Fed’s next monetary policy adjustment will be on the upside.
Fears of prolonged US-Iran aggression are backing firm hawkish Fed prospects.
Investors await the US CPI data for fresh cues regarding the current status of inflation.

According to the CME FedWatch tool, the probability of the Fed delivering at least one interest rate hike this year is almost 80%.

Higher interest rates by the Fed bode poorly for non-yielding assets, such as Silver.

Hawkish Fed prospects remain firm amid fears of a prolonged United States (US)-Iran war, a scenario that will keep the energy supply disrupted.

The longer the aggression between the US and Iran continues, the more likely it is that oil prices will remain higher.

In the last few months, the Silver price underperformed as higher oil prices de-anchored global inflationary pressures.

Meanwhile, a sharp recovery in the US Dollar is also hurting the Silver price. As of writing, the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, trades marginally lower to near 100.87. The DXY recovered after revisiting the three-week low of 100.60.

Going forward, investors await the US Consumer Price Index (CPI) data for June, which will be released on Tuesday.

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.