Silver Price Forecast: XAG/USD falls to near $55.50 amid interest rate concerns

Silver is on track to drop over 7% this week.
Rising Middle East tensions and high oil prices fuel inflation and interest rate concerns.
Fears of energy supply disruptions grow following reports of explosions and potential Red Sea shipping blockades.

Akhtar Faruqui FXStreet

Silver price (XAG/USD) remains subdued for the third successive day, trading around $55.50 per troy ounce during the Asian hours on Thursday. Silver is on track to drop over 7% this week as escalating Middle East tensions drive oil prices up. This surge in energy costs has kept inflation and interest rate concerns at the absolute forefront of investors' minds, pulling momentum away from the non-yielding precious metal.

Reuters reported on Thursday that Iran has instructed Yemen’s Houthi militia to stand ready to close the critical Red Sea oil route if the United States strikes Iranian power infrastructure, presenting a potent new threat to global energy supplies. Amplifying these concerns, the Tasnim news agency reported explosions in Bandar Abbas, Qeshm, and Ahvaz, while very loud explosions were also heard in Kuwait and as far away as Basra.

These geopolitical flare-ups follow threats made earlier this week by US President Donald Trump, who stated the US would strike Iran's bridges and power plants next week if the country does not return to the negotiating table.

Meanwhile, this week's softer-than-expected US inflation data has effectively eliminated the chance of a July rate hike, even as Fed Chair Kevin Warsh reiterates his strict commitment to fighting inflation and restoring price stability. However, the market remains sharply divided over whether the Fed will resume tightening in September. This lingering uncertainty continues to weigh heavily on Silver, keeping the non-yielding metals under pressure.

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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