Silver Prices Forecast: Will Hawkish Fed Policy Continue to Weigh?

Silver Pressured by Robust U.S. Labor Market and China’s Halt on Bullion Buying

Silver prices ended last week sharply lower, erasing earlier gains. The downturn was primarily driven by China halting bullion purchases in May and a stronger-than-expected U.S. labor market. These developments have raised concerns about silver’s value in the absence of China’s support. The weekly chart indicates silver’s near-term value at $22.27 and intermediate-term value at $21.22. With the market closing on the weak side of near-term value, further declines toward $21.22 are anticipated.

Last week, XAG/USD settled at $29.18, down $1.23 or -4.04%.

Significant Losses for Silver

Silver lost over 4.0% for the week, including a steep 6.6% decline on Friday alone, marking a significant drop in response to recent economic developments. This sharp decrease underscores the heightened volatility and bearish sentiment currently prevailing in the silver market.

Central Bank Actions and Silver Prices

China’s significant role in silver’s rally has been under scrutiny since the country paused its bullion purchases. For months, aggressive buying by central banks, especially from China, supported the rally. The halt in May has led to speculation about the intentions of central banks—whether they have stopped buying or are booking profits. Unlike high-profile investors who openly discuss their trades, central banks operate with discretion, leaving the market in a state of uncertainty. This has transformed long-term bullish investors into short-term traders, contributing to increased market volatility.

U.S. Labor Market’s Role

The strength of the U.S. labor market is another critical factor weighing on silver. The Labor Department reported that Nonfarm Payrolls (NFP) rose by 272,000 jobs in May, surpassing expectations of 185,000. Additionally, Average Hourly Earnings rose 0.4% in May, while the Unemployment Rate eased higher to 4.0%.

The robust job market, characterized by high wages and increased consumer spending, suggests persistent inflation. This scenario likely compels the Federal Reserve to maintain elevated interest rates, increasing the opportunity cost of holding non-yielding assets like silver and dampening investor sentiment.

Market Reactions and Short-Term Forecast

Following the strong U.S. jobs report, silver prices dropped over 4.0% for the week. The robust economic data strengthened the dollar, making silver more expensive for overseas buyers. Consequently, traders adjusted their expectations, now pricing in 37 basis points (bps) of rate cuts by December, down from 48 bps before the NFP data, with the first cut expected in November rather than September. Silver has finished lower for two out of the last three weeks.

China’s Influence on Silver Prices

China’s pause in bullion purchases after an 18-month buying spree is significant. Central banks often follow the Herd Theory; if China stops buying, others might follow suit. Additionally, the potential for China to start selling could further pressure silver prices. Traders are closely watching for any signs of such a shift before it becomes widely known.

Bearish Outlook for Silver

In light of the robust U.S. labor market and China’s halt in bullion purchases, the outlook for silver remains bearish in the short term. The Federal Reserve’s anticipated decision to keep interest rates high to control inflation, coupled with reduced prospects for near-term rate cuts, suggests continued downward pressure on silver prices. Traders should prepare for potential further declines as the market adjusts to these evolving conditions.