Silver Rally Stumbles But Metal Remains Supported by Industrial Demand

KEY TAKEAWAYS

• The silver market eased Wednesday, halting a strong two-week rally.
• The decline comes as expectations for the Federal Reserve to aggressively cut interest rates have subsided.
• However, strong industrial demand will continue to support prices that have surged more than 40% this year.

Silver investors took a breather Wednesday from a strong two-week rally that pushed prices to near 13-year highs. The question facing them now is whether changing sentiment regarding Federal Reserve rate cuts will extend the pullback.

The price of silver dropped 3% to $33.88 per ounce on Wednesday, pausing a rally that had seen prices 15% surge since Oct. 8.

Silver has soared about 40% this year, accompanying gold on its recent run and other precious metals because of expectations that the Fed would cut its benchmark interest rate. When interest rates drop, metals become more competitive as an investment choice because regular income returns from bonds and money-market accounts decrease.

Fuel from the Fed

The Fed fulfilled year-long expectations in September with a 50-basis point (BPS) rate cut, and investors anticipated further rate cuts ahead in what they perceived as a cooling U.S. economy. But September’s surprisingly strong U.S. employment report, as well as other indicators, have altered that perception.

Market participants now expect the Fed to cut rates an additional 50 basis points by the end of the year, according to the CME’s FedWatch tool, which calculates expectations based on fed fund futures trading data. A month ago, after the Fed’s last rate cut, traders were pricing in about a 75% chance that the Fed would trim the benchmark rate by an additional 75 basis points before year’s end.

Another explanation is that profit-taking drove a good portion of Wednesday’s pullback. Since Thursday, the price of silver has risen 10% after surpassing its most recent high in May, a bullish signal for traders focused on technical charts.

Solar Leads Demand Boost

Underlying silver’s 2024 surge and prospects moving forward: Strong industrial demand.

Compared to gold, silver has more fundamental economic value for its use in many products. In addition to the jewelry market, the green revolution has expanded demand, as silver is a primary component for solar energy applications.

Industrial demand for silver rose 11% to a record high of 654.4 million ounces in 2023, the third straight year in which demand outstripped supply, according to The Silver Institute.

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