Silver (XAG/USD) fell for a third day and traded near $74.20 in Asian hours on Monday, after being near $75.00. Prices dropped as a Middle East energy shock pushed inflation higher and lifted expectations for higher interest rates.
The US Federal Reserve turned more hawkish on inflation, with officials pointing to the need to keep price growth under control. The CME FedWatch tool shows a 48% chance of a December rate rise, up from 14% a week earlier.
Silver also faced pressure from a stronger US Dollar, linked to risk aversion during geopolitical conflict. The US and Iran remained far from an agreement to end weeks of fighting and reopen the Strait of Hormuz.
With the Strait effectively closed, oil prices kept rising, adding costs for energy-importing countries. Further tension was reported after Donald Trump warned Iran of new consequences, and Xi Jinping warned that Taiwan could trigger direct clashes between the US and China.
UBS cut its silver investment demand forecast from over 400 million ounces to 300 million ounces, citing weaker industrial demand and higher mining supply. UBS also cut its global silver deficit view to 60–70 million ounces, down from 300 million.
Looking back to late 2025, we saw silver prices fall to near $74 as markets braced for a hawkish Federal Reserve. The combination of an energy shock in the Middle East and rising geopolitical tensions pushed the odds of a December 2025 rate hike to nearly 50%. This created significant headwinds for silver as a non-yielding asset.
The situation has since evolved, as the Fed did deliver that final hike in December but has been on hold throughout 2026. Recent US Consumer Price Index data from April 2026 showed inflation cooling to 3.1%, leading to a shift in market sentiment. We are now seeing the CME FedWatch tool indicate a growing probability of a rate cut by the fourth quarter, which is a significant reversal from the outlook last year.
This changing interest rate expectation has put pressure on the US Dollar, which has retreated from its late 2025 highs. The U.S. Dollar Index (DXY), which peaked above 106 last November, is now trading closer to 103.50. A softer dollar is typically supportive for dollar-denominated assets like silver.
The pessimistic UBS forecast from last year, which cited weaker industrial demand, also appears to be facing a more complex reality. While demand from consumer electronics has been soft, global photovoltaic demand for silver is on track to surpass 250 million ounces in 2026, according to recent industry reports. This robust solar demand is keeping the physical market tighter than many had predicted.
The acute energy shock from the Strait of Hormuz closure has also subsided, easing one of the major inflationary pressures from 2025. While tensions between the US and China over Taiwan remain a source of background risk, the immediate threat of a major supply-driven price spiral has diminished. This allows markets to focus more on fundamental drivers and central bank policy.
Given this backdrop, traders should consider positioning for potential upside with defined risk. The conflicting signals between a potentially dovish Fed and mixed industrial data could increase volatility. Using long-dated call options or bull call spreads on silver futures could allow traders to capitalize on a price rally if rate cuts materialize later this year, while capping potential losses.
We are also observing the gold-to-silver ratio, which peaked near 90:1 during the fourth quarter of 2025 as silver underperformed. That ratio has since compressed to the 84:1 level, but it remains above its historical average. A further reversion toward the mean could imply that silver has more room to outperform gold in the coming months.
