As the Federal Reserve looks to be drawing its series of interest rate hikes to a close, what impact is this likely to have on silver? And how much is the price of silver impacted by where interest rates are heading both in the US, and also around the world?
Why interest rates matter for silver prices
The last year has emphasised how tied up the price of silver is with interest rates with silver enduring a multi-month slump from April to September 2022 once the Fed decided to implement its aggressive series of increases to its benchmark interest rates to try and curb escalating inflation. This series of large moves, often of 75 basis points, saw silver collapse from around $26 an ounce to $18 an ounce over the course of just six months, a drop of about 30%.
Subsequently, silver has been able to regain much of that lost ground and has now recovered back to around $24 an ounce, thanks in part to the Fed potentially having come to the end of that same rate hike cycle. This snapshot of the last year or so of silver’s price activity illustrates how important interest rates are to silver, with the physical metal typically falling out of favour among investors during times of rising interest rates due to the lack of yield it offers with other interest-bearing assets preferred instead.
It is worth noting at this point that Kinesis Silver KAG digital currency solves that headache for investors by combining the security of a physically-backed product with the dynamism of a monthly yield, paid based on the number of transactions using the specialist currency in the previous month.
The relationship between silver prices and interest rates
Silver’s reaction to the Fed’s series of large hikes shows how close and negative a relationship the precious metal can have with interest rates. In simple terms, when interest rates go up, that is typically bad for silver while when rates are falling, or not increasing, then that can be a more beneficial environment for silver.
However, while interest rates have certainly dominated investors’ thoughts in the last year or so, they are just one factor to consider when determining where the price of silver is headed. Certainly, the interest rate trajectory has been the dominant factor for silver, far outweighing the metal’s strong fundamental case in which demand is comfortably outstripping supply, but at other times other factors may have a stronger pull.
How inflation expectations impact interest rates and silver prices
The main reason behind the aggressive interest rate hikes both in the US as well as in Europe and other parts of the world, has been the surge in inflation and the need for central banks to raise interest rates to try and curb the pace at which consumer prices have been rising.
Inflation has therefore proven to be a double-edged sword for silver in recent times as while it is considered a good hedge against inflation, with the finite supply of the metal helping it to hold its value well over its long trading history, central banks’ policy of raising interest rates to bring inflation down has proven to be a real negative for the price of silver.
With inflation finally on a downward trend and with talk of further interest rate hikes being paused, the conditions for silver are looking much more favourable for the second half of the year.
Silver price forecast based on interest rate projections in 2023
While 2022 illustrated the damning impact rising interest rates can have on silver, the outlook for the rest of 2023 is looking much more supportive. Both the Fed and the European Central Bank are expected to pause further interest rate hikes very soon, with many investors forecasting that not only has the Fed already stopped hiking but there is even potential of a rate cut before the year’s end.
With the macroeconomic outlook suddenly looking more favourable for silver, attention may finally return to the metal’s outstanding fundamental case. Demand for silver is once again forecast to outstrip supply this year, according to the Silver Institute. The metal is a vital component used in key industries such as solar and electric vehicles so is set to stay in strong demand throughout the energy transition.
Therefore, with interest rates looking to be moving in silver’s favour and the fundamental case remains as strong as ever, silver could challenge first the high of 2022 in excess of $26 with the potential of pushing on further to even threaten $30 an ounce before the end of the year.
Takeaways for silver investors from interest rate analysis
Taking all things into consideration, the main takeaways are first how detrimental rising interest rates can be to silver’s price performance. Secondly, while interest rates have dominated in recent times, silver is exposed to a broad swathe of factors such as industrial outlook so it is important to consider all the factors rather than just one.
Finally, with the latest cycle of hikes seemingly coming to an end, the macroeconomic conditions look very supportive for silver, making the recent dips to around $24 an ounce an ideal opportunity to top up silver holdings, be that physical bullion or silver-backed KAG.
Rupert is a Market Analyst for Kinesis Money, responsible for updating the community with insights and analysis on the gold and silver markets. He brings with him a breadth of experience in writing about energy and commodities having worked as an oil markets reporter and then precious metals reporter during the seven years he worked at Bloomberg News.
As well as market analysis, Rupert writes longer-form thought leadership pieces on topics ranging from carbon markets, the growth of renewable energy and the challenges of avoiding greenwash while investing sustainably.
This publication is for informational purposes only and is not intended to be a solicitation, offering or recommendation of any security, commodity, derivative, investment management service or advisory service and is not commodity trading advice.