Silver Price Forecast: XAG/USD approaches oversold territory after CPI-driven sell-off

Silver (XAG/USD) experienced a significant drop of more than 5.5% on Wednesday due to robust US inflation data, which increased the likelihood of additional Federal Reserve rate hikes. This led to the US Dollar (USD) reaching a new yearly high. As of now, XAG/USD is trading near $55.78, marking its lowest point since July. The US Bureau of Labor Statistics reported that headline inflation increased to 3.7% year-over-year in September, up from 3.4% in August, surpassing expectations of 3.6%.

Core inflation, excluding food and energy, climbed to 2.6% from 2.4%, exceeding the 2.5% forecast. On a month-to-month basis, headline CPI rose by 0.6%, as expected, while core CPI increased by 0.3%, slightly above the 0.2% forecast. According to the CME FedWatch Tool, traders now anticipate a 43% chance of a rate increase at the Fed’s October 27-28 meeting, up from 22% prior to the release, and the likelihood of a December rate hike is near 95%.

Higher borrowing costs make interest-bearing assets more appealing, thus decreasing the demand for Silver, which does not generate income. A stronger US Dollar adds pressure by increasing the metal's cost for foreign buyers. The technical analysis indicates that buyers currently dominate the market. On the daily chart, XAG/USD is below the 50-day, 100-day, and 200-day Simple Moving Averages (SMAs), all clustered around $63-$72.

The latest decline has brought Silver close to July's lows, which also mark its year-to-date lows. Momentum indicators remain bearish, with the Relative Strength Index (RSI) near 30 approaching oversold territory, implying that the decline could be overdone, while the Moving Average Convergence Divergence (MACD) remains negative, reinforcing persistent bearish momentum.

The next resistance levels are the $60 psychological mark, the 100-day SMA at $63, and the 50-day SMA at $64. Silver is a precious metal frequently traded by investors and has been utilized as a store of value and a means of exchange for centuries. Although less popular than Gold, Silver can be an attractive option for investors seeking diversification in their portfolios, due to its intrinsic value or as a potential hedge during high-inflation periods.

Investors can acquire physical Silver, either in coins or bars, or trade it through Exchange Traded Funds, which mirror its price on international markets. Silver prices are influenced by various factors, including geopolitical instability or fears of a severe recession, which can drive Silver prices up, albeit to a lesser extent than Gold's.

As a yieldless asset, Silver generally increases when interest rates are low. Its movements are also affected by the US Dollar (USD), as Silver is priced in dollars (XAG/USD). A strong Dollar typically keeps Silver prices low, while a weaker Dollar is likely to boost prices. Other elements, such as investment demand, mining supply, and recycling rates, can also impact Silver prices.

Silver has multiple industrial applications, particularly in electronics and solar energy, due to its high electrical conductivity. A surge in demand can raise prices, while a decline tends to lower them. Silver prices tend to follow Gold's movements, as they are both considered safe-haven assets. The Gold/Silver ratio, indicating the number of Silver ounces needed to equal the value of one Gold ounce, can help determine the relative valuation of both metals.