Silver (XAG) Forecast: Will Middle East De-escalation Sink Silver Prices?

Middle East Chess Game Rattles Silver Markets

Silver futures retreated Monday, responding to signs of de-escalation in Middle East tensions following Israel’s targeted strikes against Iran. The precious metal dropped 0.97% as markets interpreted recent events as a potential easing of regional conflict. Israel’s decision to avoid targeting Iran’s nuclear facilities or oil infrastructure, coupled with Iran’s measured response, suggested both sides were seeking to prevent further escalation.

Technically, the trend is up, but momentum has shifted to the downside with $32.49 the next likely target prices. Look for buyers to re-emerge on a test of this pivot. The key resistance is last week’s high at $34.87, followed by a 12-year high at $35.40.

At 11:37 GMT, XAG/USD is trading $33.34, down $0.38 or -1.12%.

Risk Premium: Walking the Geopolitical Tightrope

While geopolitical risk premiums remain embedded in silver prices, markets are recalibrating their assessment. The cautious approach by major players toward oil infrastructure, with only limited disruptions from Houthi militants in the Red Sea, suggests the risk premium should only increase if direct threats to energy infrastructure materialize.

Gold’s Record Run Casts Silver Shadow

Silver’s movement closely tracks gold, which recently achieved a record high of $2,758.53, driven by safe-haven demand amid ongoing conflicts in the Middle East and Ukraine. However, both precious metals face headwinds from a strengthening dollar and rising Treasury yields. The dollar index is heading for its strongest monthly performance since April 2022, making silver less attractive to international buyers. Meanwhile, benchmark 10-year Treasury yields have climbed to a three-month high of 4.26%.

Economic Crystal Ball: Fed Watching and Market Metrics

Market attention is now focused on upcoming U.S. economic data that could influence Federal Reserve policy decisions. Key releases include ADP employment figures on Wednesday, Personal Consumption Expenditures (PCE) data on Thursday, and the Friday payrolls report. These indicators will be crucial in shaping interest rate expectations, with traders currently pricing a 95% probability of a 25-basis-point cut by November.

East Meets West: Shifting Demand Patterns

Physical demand patterns are shifting, with Chinese gold consumption dropping 11.2% year-on-year in the first three quarters of 2024 as high prices dampened jewelry demand. Market observers note a significant shift in precious metals demand from East to West, potentially affecting both gold and silver markets.

Silver’s Perfect Storm: Navigating Future Currents

Looking ahead, several factors could influence silver prices: monetary policy expectations, with lower interest rates typically supporting precious metals; economic data suggesting recession risks could boost safe-haven demand; and geopolitical developments that might affect risk premiums. The interplay between these factors, combined with dollar strength and yield movements, will likely determine silver’s trend in the coming months.