Silver (XAG) Forecast: Silver Market Under Pressure as Oil Rally Delays Fed Cuts

Silver Under Pressure Sunday as Oil Drives Inflation Fears

Spot silver opened a little softer on Sunday after facing pressure the previous session. In my opinion, traders are focusing on one factor, the sharp rally in crude oil that is reshaping expectations for inflation and interest rates. The energy market has been the main driver of bearish sentiment since the U.S.-Iran war began on February 28, and the more than $30 spike in oil prices pushed silver traders to rethink how long interest rates may stay elevated. That shift in expectations is what’s weighing on silver demand.

At 22:51 GMT, XAGUSD is trading $80.37, down $0.24 or -0.30%.

Brent Breaks Over $100 as Strait Disruptions Tighten Supply

The rally in oil has been fueled by concerns that global supply could tighten if shipping routes remain disrupted. Some estimates suggests that millions of barrels per day have already been removed from the market, increasing fears of a prolonged energy shock. This news has driven Brent oil prices to over $100 a barrel with WTI following closely behind.

For financial market traders, rising energy costs are not just about gasoline prices. When oil rises fast, investors after expect inflation to increase as well, potentially spreading to major industries such as transportation, manufacturing and agriculture.

September Is Now the Best Guess for a Rate Cut

The way I see it, the oil surge has also reduced expectations that the Federal Reserve could cut interest rates soon. This week, the Fed is widely expected to keep its benchmark where it is at 3.50% to 3.75%. The odds of June and July rate cuts are less than 50%, which leaves us with September as the next best time period. However, this is just a guess right now because no one is certain as to when the war will end, when the Strait of Hormuz will open to tanker traffic, and how long it will take to repair the Middle Eastern infrastructure destroyed by Iranian bombs.

Silver Traders Have No Choice but to Trim Long Positions

Silver traders are counting on lower rates to fuel this ongoing long-term rally. But with uncertainty about the timing of rate cuts building, their only choice is to adjust their long positions to the prospect of higher rates for longer.

Silver Doesn’t Pay You — and That’s the Problem Right Now

Looking at the other side of the weakness in silver, we see a stronger dollar and higher bond yields. You see, silver doesn’t pay you when you buy it. There is no dividend or yield, It is an investment and has to compete with other assets for investment dollars. Higher yields could be pulling money out of silver and into other assets that pay.

Watch the $100 Level in Crude — That’s What the Pros Are Watching

Keep an eye on the $100 level for both Brent and WTI crude oil. That’s what professional silver traders are watching. It will tell us if inflation expectations will remain elevated and further delay a Fed rate cut, or it inflation will remain sticky, but contained, and the Fed could go about it’s normal business of boosting employment while stopping the rise in inflation.

More Information in our Economic Calendar.