Silver Price Forecast: XAG/USD depreciates to near $29.00 due to China’s demand concerns

Silver price depreciates as the slowing Chinese economy could negatively impact the industrial demand for the asset.
The grey metal may limit its downside as challenges in mining production could lead to tighter supplies.
The rising odds of the Fed reducing rates could support the demand for non-yielding assets like Silver.

Akhtar Faruqui FXStreet

Silver price (XAG/USD) continues its losing streak for the fourth consecutive day, trading around $29.20 per troy ounce during the Asian hours on Monday. The grey metal faces challenges due to a slowing Chinese economy, the world's largest manufacturing hub. China's industrial demand for Silver is significant, as it is essential in various applications such as electronics, solar panels, and automotive components.

However, Silver could limit its downside as supply could fail to keep pace. “Mining production has been affected by labor shortages and environmental regulations, leading to tighter supplies. According to the Silver Institute’s estimates, 2024 is expected to be the fourth consecutive year of a supply deficit, Business Standard cited Navneet Damani, group senior vice-president, head of commodities research, Motilal Oswal Financial Services.

Additionally, Silver prices may also find support as the dovish sentiment surrounding the Federal Reserve's policy stance could support the demand of the non-yielding asset. Lower interest rates could attract buyers toward assets like Silver. According to CME Group’s FedWatch Tool, the markets show a 91.7% probability of a 25-basis point rate cut at the September Fed meeting, up from 90.3% a week earlier.

Federal Reserve Bank of New York President John Williams stated on Friday that the long-term trends that caused declines in neutral interest rates before the pandemic continue to prevail. Williams noted, "My own Holston-Laubach-Williams estimates for r-star in the United States, Canada, and the Euro area are about the same level as they were before the pandemic," according to Bloomberg.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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