XAG/USD surges to nearly .50 amid rising geopolitical tensions

XAG/USD surges to nearly $31.50 amid rising geopolitical tensions

  • Silver prices are receiving support from safe-haven inflows amid escalating tensions in the Middle East.
  • Non-yielding silver could be negatively impacted by persistently high interest rates, as the decreasing likelihood of a Fed rate cut reduces its attractiveness.
  • A decline in manufacturing activity in China may have dampened the positive impact of fiscal and monetary stimulus on silver demand.

Silver prices (XAG/USD) extended gains for the second straight session, trading at around $31.50 an ounce during European trading hours on Wednesday. The bullish trend in silver prices is attributed to safe-haven inflows amid escalating geopolitical tensions in the Middle East.

Iran fired over 200 ballistic missiles at Israel on Tuesday, shortly after the US warned of an imminent attack. According to Bloomberg, Israeli forces reported that several of the rockets were intercepted, while one person was reportedly killed in the West Bank.

Israeli Prime Minister Benjamin Netanyahu announced retaliatory measures against Iran after a rocket attack on Tuesday. In response, Tehran warned that any retaliation would result in “great destruction,” raising concerns about the possibility of a wider conflict.

On Tuesday, the weaker-than-expected ISM manufacturing purchasing managers’ index gave the US Federal Reserve (Fed) the opportunity to further cut interest rates. The index was at 47.2 in September, in line with the August value, but remained below the market expectation of 47.5. However, Fed Chairman Jerome Powell said on Monday that the central bank was in no hurry and would gradually lower its key interest rate “over time.”

The CME FedWatch Tool says markets place a 62.7% chance of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point rate cut is 37.3%, compared to 57.4% a week ago. Continued higher interest rates mean that the opportunity cost of holding non-yielding assets like silver is higher, making it less attractive to investors looking for more attractive, higher-yield alternatives.

Silver demand was boosted by China’s fiscal and monetary stimulus, particularly benefiting industrial applications in one of the world’s largest manufacturing hubs. However, weaker-than-expected demand growth in China, coupled with data suggesting a decline in manufacturing activity, may have limited the gray metal’s upside potential.

Frequently asked questions about silver

Silver is a heavily traded precious metal among investors. In the past, it was used as a store of value and medium of exchange. Although it is less popular than gold, traders may turn to silver to diversify their investment portfolio, for its intrinsic value, or as a potential hedge during times of high inflation. Investors can purchase physical silver in coins or bars, or trade it through vehicles such as exchange-traded funds that track its price on international markets.

The price of silver can fluctuate based on a variety of factors. Geopolitical instability or fear of a deep recession can cause silver prices to escalate due to its safe-haven status, although to a lesser extent than gold. As a non-yielding asset, silver tends to appreciate when interest rates are lower. Its movements also depend on how the US dollar (USD) behaves when the asset is valued in dollars (XAG/USD). A strong dollar tends to keep silver prices in check, while a weaker dollar is likely to push prices higher. Other factors such as investment demand, mining supply – silver is much more common than gold – and recycling rates can also impact prices.

Silver is widely used in industry, particularly in areas such as electronics or solar energy, because it has one of the highest electrical conductivities of any metal – more than copper and gold. An increase in demand can increase prices, while a decrease tends to lower them. Dynamics in the economies of the US, China and India can also contribute to price fluctuations: in the US and especially China, their large industrial sectors use silver in various processes; In India, consumer demand for the precious metal for jewelry also plays a crucial role in pricing.

The price of silver tends to follow the movements of gold. When gold prices rise, silver tends to follow suit as their safe-haven status is similar. The gold/silver ratio, which indicates the number of ounces of silver required to equal the value of one ounce of gold, can help determine the relative valuation of both metals. Some investors may view a high ratio as an indicator that silver is undervalued or gold is overvalued. On the contrary, a low ratio could indicate that gold is undervalued compared to silver.