Silver (XAG) Forecast: Will Industrial Demand Concerns Halt a Potential Silver Rally?

Market Context

Silver prices saw a slight decline on Tuesday despite increased speculation about substantial U.S. interest rate cuts later this year. This dip follows a significant drop to the lowest point since early May, primarily driven by recession fears in the United States. Unlike gold, silver is particularly sensitive to industrial demand, making economic slowdowns in major markets like China and the U.S. particularly concerning for silver investors.

At 11:42 GMT, XAG/USD is trading $27.08, down $0.16 or -0.58%.

Interest Rate Expectations and Silver Prices

Federal Reserve officials have reinforced expectations of significant rate cuts, with markets now anticipating 110 basis points of easing this year. A 50 basis point cut in September is currently priced at a 70% probability. Federal Reserve Chair Jerome Powell hinted that a rate cut cycle could commence as early as September, which could significantly impact silver prices by putting downward pressure on the dollar and bond yields, enhancing the appeal of non-yielding assets like silver.

Industrial Demand and Economic Concerns

Silver’s heavy reliance on industrial demand means that forecasts of weakening economies in the U.S. and China are particularly troubling. The 200-day moving average at $26.05 is a critical technical level that could either support prices or trigger a further decline. Meanwhile, the U.S. trade deficit figures for June, set to be released on Tuesday, will be closely watched by traders for further economic insights.

Treasury Yields and Market Reactions

On Tuesday, the 10-year Treasury yield rebounded after hitting its lowest level in over a year, trading 5 basis points higher at 3.8371%. The 2-year Treasury yield also increased by over 7 basis points to 3.9627%. This recovery in yields followed a dramatic sell-off on Monday, driven by fears of a worsening economic outlook based on weaker-than-expected economic data. However, some analysts believe that the market is merely undergoing a correction rather than entering a prolonged downturn.

Market Forecast

Given the current economic indicators and the Federal Reserve’s dovish stance, the short-term outlook for silver remains mixed. While potential rate cuts could provide some support, persistent concerns about industrial demand amid slowing global economies may limit significant upside movements.

If the upcoming U.S. economic data disappoints and the Federal Reserve adopts a more aggressive rate-cutting policy, silver could move towards $30 or higher. However, the critical 200-day moving average will be a key level to watch, as breaking below this could signal further declines.

Technical Analysis

XAG/USD is lower on Tuesday, staddling a pivot at $27.23, while trying to establish direction. A sustained move under this level will be a sign of weakness with the next target the 200-day moving average at $26.05.

The 200-day MA is crucial to the long-term structure of the market. We could see a technical bounce on the initial test of this level, or we could see an acceleration to the downside if it fails. Traders should monitor it closely. Meanwhile, overtaking the pivot at $27.23 may breathe some life into the market if buyers can sustain the move. However, we’re not likely to see an impressive rally until the 50-day moving average at $29.65 is overcome.