Silver slides below $65 as US PPI reinforces Fed rate-hike bets
- Silver tumbles more than 4% on Thursday, pressured by rising US Treasury yields.
- US producer inflation remains elevated, keeping the prospect of a rate hike alive.
- Investors now turn their attention to US consumer inflation data due on Friday.
Silver (XAG/USD) extends its sharp decline on Thursday, trading around $64.35 per ounce at the time of writing, down 4.39% on the day. The white metal comes under pressure from rising US Treasury yields and a firmer US Dollar (USD), as the latest inflation data reinforce expectations of tighter monetary policy from the Federal Reserve (Fed).
The US Producer Price Index (PPI) rose 0.4% MoM in August, in line with market expectations and accelerating from the 0.1% increase recorded in July. On an annual basis, producer inflation climbed to 5.4%, slightly above the 5.3% expected and up from 4.8% previously.
Underlying inflationary pressures appear somewhat more moderate. The PPI excluding food and energy rose 0.2% MoM, below the 0.3% expected and the previous 0.3% increase. On an annual basis, however, the measure accelerated to 4.6% from 4.3% in July, in line with forecasts.
These figures keep the possibility of further monetary tightening in the United States on the table. Rising Oil prices, driven by tensions in the Middle East, also add to concerns about the inflation outlook. According to the CME FedWatch tool, markets price in around a 70% chance of a rate hike at the Fed's next meeting, compared to around 61% before the data were released.
This backdrop is unfavorable for Silver. Like other precious metals, the asset does not offer a yield, which tends to reduce its appeal when interest rates and bond yields rise.
Meanwhile, the US Dollar Index (DXY), which measures the value of the Greenback against a basket of six major currencies, trades higher on Thursday at around 98.90 at the time of press. A stronger US Dollar also makes Silver more expensive for investors using other currencies, adding to the pressure on the metal.
US Treasury yields reinforce the move. The benchmark 10-year US Treasury yield trades around 4.92%, its highest level since November 2023, after the US Treasury's expanded bond buyback plan failed to impress markets.
Attention now turns to the US Consumer Price Index (CPI) data due on Friday. Another upside inflation surprise could reinforce expectations of a Fed rate hike and keep Silver under pressure. Conversely, softer figures could ease concerns about further monetary tightening and offer some relief to the white metal.
Silver FAQs
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.
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.
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.
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.
