Silver (XAG) Forecast: Rising Oil Prices Cloud the Near-Term Silver Outlook

Silver Edges Higher but Stays Rangebound Heading Into the Weekend

Spot Silver is edging higher late Friday as we approach the last couple of hours ahead of the weekend. Today features another tight trading range for a third straight session after Tuesday’s sharp break that was fueled by a spike in U.S. Treasury yields. Traders appear to be weighing inflation fears and a surprisingly weak jobs report against growing uncertainty over the Fed’s next move. It’s this uncertainty keeping most of the major players on the sidelines at this time.

Yields and Dollar Weakness Give Silver an Early Lift

Silver rose early in the session after Treasury yields and the U.S. Dollar weakened overnight ahead of the February U.S. non-farm payrolls report. Silver held on to those gains after the latest jobs report showed the economy unexpectedly lost 92,000 jobs in February. Economists had been expecting a gain of roughly 55,000 to 59,000 jobs. The unemployment rate also ticked up to 4.4%.

Stagflation Warning Puts the Fed in a Bind

Today’s jobs data signaled that the labor market may be losing momentum after several months of slowing hiring. The weak report also raised questions about the strength of the broader economy. At the same time, wage growth remained relatively firm, increasing 3.8% year over year. That combination of softer job growth but steady wages creates problems for the Fed, as inflation risks remain present even while economic growth cools. That sounds like the classic definition of stagflation.

Safe-Haven Buyers May Have Already Turned Into Sellers

Oil prices climbed above $90 per barrel, the highest level in nearly two years, as supply disruptions and geopolitical tensions in the Middle East raised concerns about global energy supply. At the start of this week, speculators bought gold and silver as a safe-haven, but those buyers may have quickly turned into sellers as traders started to price in the possibility that a weak jobs market combined with high oil-induced inflation, would reduce the chances of a cut from the Fed.

The Rate Cut Story Is Still Silver’s Biggest Wildcard

However, I see it another way. One of the primary reasons silver rallied last year and is up this year is because speculators are pricing in at least two rate cuts by the Fed this year. I don’t see how they can make the first cut if crude oil prices remain elevated for a prolonged period of time and inflation rises further above the 2% mandate. The Fed has been wrong before when calling inflation transitory and it hasn’t convinced me yet that it’s fully prepared to make the right decision at this time.

If inflation fears continue to build while economic indicators weaken, silver traders will remain cautious, and silver may lose its luster on the thought of the Fed holding rates higher for longer.

More Information in our Economic Calendar.