Silver price falls as stronger US PMI reinforces hawkish Fed expectations

Silver falls toward $57.20 after stronger-than-expected US ISM Manufacturing PMI data.
Robust US manufacturing activity reinforces expectations of a hawkish Federal Reserve.
Investors scale back easing expectations, weighing on precious metals.

Ghiles Guezout FXStreet

Silver (XAG/USD) trades around $57.20 at the time of writing on Monday, down 0.73% on the day, after a strong US manufacturing report reinforced expectations that the Federal Reserve (Fed) will maintain a restrictive monetary policy.

The Institute for Supply Management (ISM) reported that its Manufacturing Purchasing Managers Index (PMI) rose to 55.6 in July from 53.3 in June, beating market expectations of 54. The release showed that US manufacturing activity accelerated at its fastest pace in more than four years.

The report's underlying components also pointed to a resilient manufacturing sector. The Employment Index climbed to 52.8 from 49.7, signaling a return to payroll growth, while the Prices Paid Index eased slightly to 71.1 from 73 but remained above the market forecast of 70.3, indicating that inflationary pressures remain elevated.

According to Susan Spence, Chair of the ISM Manufacturing Business Survey Committee, four of the five PMI sub-indices accelerated compared with June, confirming the strengthening momentum in the manufacturing sector.

The stronger economic data provide the Federal Reserve (Fed) with greater flexibility to tighten monetary policy further in its fight against inflation. Higher-for-longer interest rate expectations increase the opportunity cost of holding non-yielding assets such as Silver, limiting the metal's upside despite the recent support provided by easing geopolitical tensions in the Middle East.

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.

Author

Ghiles Guezout

FXStreet

Ghiles Guezout is a Market Analyst with a strong background in stock market investments, trading, and cryptocurrencies. He combines fundamental and technical analysis skills to identify market opportunities.

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