Silver Price Forecast: XAG/USD falls to near $63.50 amid Fed hike bets, higher oil prices

On Monday, the price of silver (XAG/USD) waned from its previous day's gains, settling around $63.50 per troy ounce during Asian trading hours. The dip in silver prices is largely attributed to mounting anticipation of Federal Reserve (Fed) rate hikes, particularly for the upcoming September meeting. This expectation intensifies due to surging US inflation statistics, which have compelled the central bank to consider further monetary tightening.

According to the Bureau of Labor Statistics, the US Consumer Price Index (CPI) experienced a 0.4% increase month-over-month in August, marking a 12-month growth rate of 3.4%. Moreover, the core CPI rose by 0.3% monthly, exceeding the prior month's 0.2% growth. Such data has solidified the view among financial markets that a rate increase is imminent, with the CME FedWatch tool suggesting an 87% chance of a quarter-point rate hike at the next meeting, a significant jump from 59% the previous week.

Apart from the Fed's policy stance, the precious metal is grappling with the ramifications of an ongoing crisis in the Middle East, contributing to elevated oil prices and exacerbating inflationary pressures worldwide. A drone attack on a major Saudi Arabian crude pipeline has temporarily halted operations on the East-West pipeline, disrupting an essential transport route that circumvents the Strait of Hormuz.

In response, operations were suspended, and no timeline has been provided for their resumption. Rabobank analysts emphasize that the renewed oil shock, triggered by the pipeline shutdown due to Houthi attacks, has already reverberated through the rate markets, leading to a surge in bond yields. Consequently, this shift in risk sentiment is now impacting broader markets, as Asian equity indices and US equity futures have been largely in decline.

Silver, a widely traded precious metal, serves as a store of value and a medium of exchange, often employed as a hedge during periods of high inflation. Investors have the option to acquire physical silver, such as coins or bars, or trade it via Exchange Traded Funds that mirror its price on global markets. Silver prices fluctuate due to diverse factors, including geopolitical instability, recession fears, and the US Dollar's performance.

As a yield-free asset, silver typically appreciates when interest rates decline and depreciates when rates rise. Its valuation is also influenced by investment demand, mining supply, recycling rates, and industrial usage, which is particularly significant in the electronics and solar energy sectors. Silver prices tend to mirror Gold's movements, with their status as safe-haven assets driving their correlation.

The Gold/Silver ratio can provide insights into the relative valuation of both metals, with a higher ratio potentially indicating undervaluation of silver or overvaluation of gold.