Silver Price Forecast: XAG Supported by US Credit Downgrade, Rate Hike Headwinds Limit Gains

Highlights

• Silver prices rise on Fitch’s US credit rating downgrade.
• Rising government debt burden and fiscal concerns fuel demand.
• Fitch predicts a mild recession, impacting silver and economy.

Overview

Silver (XAG) prices are edging higher in response to Fitch’s unexpected decision to downgrade the United States’ triple-A credit rating to AA+. This move has raised concerns over the country’s fiscal deterioration and rising government debt burden over the next three years. As confidence in the economy waned, investors turned to the safety of silver and gold, driving demand higher.

Fitch Downgrade: Governance Erosion, Rising Deficits

Fitch’s downgrade reflects an erosion of governance standards over the last two decades, manifested in repeated debt limit standoffs and last-minute resolutions. The lack of a medium-term fiscal framework and complex budgeting process have contributed to successive debt increases. Additionally, rising deficits are expected, with the general government deficit projected to reach 6.6% of GDP in 2024 and further widen to 6.9% in 2025.

The rising general government debt is a cause for concern, with the debt-to-GDP ratio projected to reach 118.4% by 2025. The U.S. fiscal position becomes more vulnerable to future economic shocks due to these projections.

Despite several structural strengths supporting the U.S. economy, Fitch predicts a mild recession in the fourth quarter of 2023 and the first quarter of 2024, with annual real GDP growth slowing to 1.2% this year. The Federal Reserve’s tightening measures and the goal to bring inflation towards its 2% target are complicating the situation.

Silver Resilient Amid Uncertainty

As markets stay watchful, silver remains a preferred safe-haven investment in times of economic uncertainty and stress, though the recent strengthening of the U.S. dollar caused a temporary setback.

All eyes are now on the upcoming non-farm payrolls report, which will be a crucial indicator of the U.S. economy’s health. Expectations are set for job numbers to rise in July, following a solid increase in June.

Higher interest rates pose a challenge for silver investors, as it increases the cost of holding the precious metal with no yield and additional expenses for storage and insurance.

Short-Term Forecast:  Weak on Rate Hike Concerns with Fitch Downgrade a Wildcard

In conclusion, the downgrade of the United States’ credit rating has drawn significant attention, prompting investors to seek safety in precious metals like silver. The evolving economic situation and impending non-farm payrolls report will play a crucial role in shaping market sentiment in the near term. However, uncertainties remain as the U.S. navigates through fiscal challenges and adjusts to the impact of the rating downgrade.

Technical Analysis

Silver (XAG) is displaying mixed sentiment as its 4-hour price of 24.30 remains above the 200-4H moving average at 23.74, indicating potential bullish tendencies. However, it is still below the 50-4H moving average at 24.53, signaling some bearish pressure. The 14-4H RSI at 43.94 reflects weaker momentum below the neutral level of 50.

The commodity currently holds above the main support area of 24.04 to 24.20, offering short-term stability. The main resistance area is at 25.00 to 25.27. Traders should monitor price action near these levels for possible trend changes.

The market for Silver (XAG) is presently showing mixed signals, but this can quickly shift to bearish if the support area fails to hold.