Key Takeways:
- Silver prices edge higher ahead of ECB interest rate decision
- Expectations of rate cuts by central banks boost Silver as a non-yielding asset
- US CPI data increases odds of Fed rate cut in September
- UK economic growth stagnation raises expectations of rate cut by BoE
Silver price holds gains ahead of ECB interest rate decision
Silver price (XAG/USD) edges higher for the fourth consecutive day, trading around $28.74 during the Asian hours on Thursday. The non-yielding assets like Silver receive support as traders anticipate that the European Central Bank (ECB) will lower interest rates to 4.0% by implementing a 25 basis points rate cut at its upcoming policy meeting later in the day.
Monetary Policy Easing Supports Silver
Easing monetary policies by central banks globally benefits Silver by reducing the opportunity cost of holding non-interest-bearing bullion assets. August’s US Consumer Price Index (CPI) data showed that headline inflation dropped to a three-year low, which has increased expectations of a 25-basis points rate cut by the Fed in September. Investors will shift focus on the US Producer Price Index and Initial Jobless Claims data scheduled for Thursday for further insights.
Economic Uncertainty in UK and US
Moreover, no growth in the UK economy reinforces expectations of a possible quarter-point rate cut by the Bank of England (BoE) in November. Some traders are also pricing in the possibility of an additional rate cut in December. The US CPI fell to 2.5% year-on-year in August, down from the previous reading of 2.9% and below the expected 2.6%.
Market Expectations and Outlook
According to the CME FedWatch Tool, markets are fully anticipating at least a 25 basis point (bps) rate cut by the Federal Reserve at its September meeting. The likelihood of a 50 bps rate cut has sharply decreased to 15.0%, down from 44.0% a week ago.
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.