Silver (XAG/USD) trades around $80.50 on Tuesday at the time of writing, down 0.60% on the day. The white metal remains under pressure as expectations for near-term US interest rate cuts fade amid rising inflation concerns linked to the Middle East conflict.
Markets widely expect the Fed to keep its benchmark interest rate unchanged in the 3.50%-3.75% range at Wednesday’s meeting, according to the CME FedWatch tool. If confirmed, it would mark the second consecutive pause following the central bank’s previous easing cycle. A prolonged pause in monetary easing tends to weigh on non-yielding assets such as Silver, as higher interest-rate expectations increase the opportunity cost of holding precious metals.
The escalation of geopolitical tensions in the Middle East has pushed Oil prices higher and raised fears of persistent inflationary pressures. Higher gasoline costs in the United States (US) are already increasing the financial burden on households, which could keep inflation expectations elevated and encourage policymakers to maintain restrictive monetary conditions for longer.
At the same time, geopolitical developments continue to shape sentiment in the precious metals market. The United States recently targeted Iran’s key Oil export hub on Kharg Island, heightening fears over global energy supply disruptions. Although Washington has suggested that the conflict could end within weeks and has discussed forming an international coalition to secure shipping through the Strait of Hormuz, the ongoing tensions keep a layer of uncertainty in financial markets.
This uncertain geopolitical backdrop could help limit deeper declines in Silver prices. Safe-haven assets, such as Silver, tend to attract demand during periods of heightened geopolitical risk, which may cushion the downside even as expectations of prolonged higher interest rates weigh on investor appetite for non-yielding assets.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
