Where to Begin
Recent turmoil in the Middle East has led to increased volatility in international oil prices. Rising inflation expectations keep the Federal Reserve's rate hike outlook strong, with the US dollar index and Treasury yields remaining elevated. The oversold bounce sentiment from consecutive declines in precious metals prices has built up, allowing silver prices to recover somewhat. However, geopolitical uncertainties persist, and the macroeconomic monetary environment continues to exert significant pressure on precious metals. This, combined with the Federal Reserve's policy meeting this week, has fostered a cautious market mood, suggesting silver prices may oscillate weakly. The primary focus ahead is on inflation data and the Fed's monetary policy guidance.
US Inflation Cools, Economy Shows Resilience
The US economy continues to demonstrate notable resilience. The June manufacturing PMI came in at 53.3, slightly below the expected 54 and the prior 54, indicating the manufacturing sector remains in expansion. Production and order demand have eased modestly but retained resilience, while the employment sub-index continues to improve yet remains below the 50 breakeven point. The services PMI dipped from 54.5 to 54.0, against an expectation of 54.2, marking 24 consecutive months in expansion territory. The employment index posted its largest gain since 2024 and returned to expansion. The prices paid index fell to a four-month low.
US inflation data for June surprised to the downside. The CPI fell 0.4% month-on-month, the largest single-month decline since April 2020, and the year-on-year rate dropped to 3.5%, significantly below the prior 4.2%. Core CPI was flat month-on-month and eased to 2.6% year-on-year, indicating a notable weakening of inflation stickiness. The primary driver of this cooling inflation was a sharp decline in energy prices. The energy component fell 5.7% month-on-month in June, with gasoline and energy commodity prices dropping substantially, effectively alleviating inflationary pressures. This data supports a downward revision of rate hike expectations. Additionally, the US labor market is also cooling. Non-farm payrolls increased by only 57,000 in June, far below the market expectation of 113,000, and the April and May figures were revised down by a cumulative 74,000. Employment in leisure and hospitality, retail, and information sectors has dropped notably, while wage growth remains steady, reducing the risk of a "wage-price spiral." With both inflation and employment data weakening, expectations for a Fed rate hike this year have been adjusted downward. However, due to the escalating Middle East conflict, international oil prices have rebounded, fueling market concerns about a resurgence of inflation. Future monetary policy is expected to maintain a neutral-to-tight bias.
This Week's Fed Meeting Fuels Rate Hike Expectations
Driven by rising oil prices, geopolitical conflicts, and AI-related demand pushing up inflation, market expectations for a 25-basis-point rate hike by the Fed this week have surged to 36%-40%. Furthermore, recent Fed officials have struck a "hawkish" tone. New Fed Chair Kevin Warsh has adopted a strongly hawkish stance, explicitly stating a "zero tolerance" for the persistently high inflation that has lasted for five years and clearly refuting the market view that the fight against inflation is "complete" based on the June CPI decline. Warsh's hawkish stance has weakened market expectations for a rate cut this year, keeping the US dollar index and Treasury yields elevated, thereby increasing the upward pressure on precious metal prices. Looking ahead, while the market is pricing in a higher probability of a precautionary rate hike, the base case scenario remains unchanged rates until the second half of 2026. Warsh has explicitly stated that the Fed will not provide forward guidance on the future path of interest rates, making future US economic data and Fed officials' statements particularly important. Considering that the labor market may cool further and that lower oil prices and subdued wage growth should help keep inflation in check, the expectation is for the Fed to hold rates steady until September. The probability of a rate hike in December is near 90%, with the baseline scenario being two rate hikes in 2027.
Silver Industrial Demand Declines
In recent years, under the global new energy revolution led by China, the photovoltaic industry has been the primary driver of silver's industrial demand. Over the past four years, the cumulative supply deficit for silver has been approximately 20,000 tonnes, equivalent to about half a year's global production. The global silver supply deficit is projected to be 1,440 tonnes in 2026, a widening from 2025, and remains at a high level. This persistent supply shortage could further support silver prices. Total global silver supply in 2026 is estimated at 33,167 tonnes, a decrease of 747 tonnes from 2025, with mine supply at 26,254 tonnes and recycled silver at 6,571 tonnes. On the demand side, total global silver demand in 2026 is forecast at 34,606 tonnes, a decrease of 560 tonnes from 2025. Notably, total industrial demand for silver has fallen for three consecutive years. Industrial silver demand is projected to be 19,894 tonnes in 2026, accounting for 57% of total demand, down from 20,447 tonnes in 2025, a year-on-year decline of 3%. Silver demand from the photovoltaic industry is expected to continue its decline, reaching 4,698 tonnes in 2026, a decrease of 932 tonnes from 2025. Physical demand for silver is expected to increase in 2026, reaching 8,013 tonnes. Although a supply-demand gap may still exist this year, as the peak of domestic photovoltaic installations concludes, silver consumption demand could face headwinds.
Gold-Silver Ratio Still Has Room for Correction
While both gold and silver are considered precious metals and their prices generally move in the same direction, their price trends differ significantly due to their distinct fundamental properties. Gold is a strong inflation hedge but is more heavily influenced by its safe-haven appeal, with its primary demand coming from investment or risk aversion, serving as a hedge against inflation and a safe asset during weak market conditions. Silver possesses both financial and industrial attributes, being widely used in photovoltaics, electronics, new energy, and industrial manufacturing. Industrial end-use accounts for nearly 60% of silver consumption. Silver prices are more sensitive to the economic cycle, as an economic recession can drag down prices from the demand side, creating a negative impact. During periods of high economic or geopolitical uncertainty, gold tends to outperform silver, causing the gold-silver ratio to widen. During economic recovery, as industrial demand rises, silver tends to outperform gold, narrowing the ratio. From late November 2025 to early February 2026, silver's price increase significantly outpaced gold's, causing the gold-silver ratio to fall rapidly from around 80 to near 46. Subsequently, silver prices corrected sharply, and the ratio rebounded to around 61, but it still remains at a historically low level. The gold-silver ratio may still have room for further upward correction.
Overall Assessment
In summary, current geopolitical uncertainties persist, and the macroeconomic monetary environment continues to exert strong pressure on precious metal prices. This, combined with the Fed's policy meeting this week, suggests silver prices will likely remain weak and range-bound. If the Fed unexpectedly raises rates at its July meeting, the market will reprice a tighter path, leading to a sustained surge in Treasury yields. Given silver's stronger industrial attributes and higher price volatility, its price decline could be more significant if the Fed surprises with a 25-basis-point hike. If the Fed holds steady, the near-term rate hike expectation would be invalidated, leading to a simultaneous weakening of Treasury yields and the US dollar, offering a short-term rebound for gold and silver prices. However, any such rebound would likely be a short-term move, with the expected rate hike in September capping the upside.
Comments