Silver price hit a nine-month high of $26.96 in early March as precious metals rallied on the back of the Russia-Ukraine war. Four months later, the metal has dropped below the psychologically critical level of $20. Late last week, it dropped to $19.39; its lowest level in about two years. In early Tuesday trade, the bulls momentarily boosted it back above $20 but lacked enough momentum to sustain it above that crucial support zone. As at the time of writing, it was at $19.88.
What’s behind the decline in silver price?
Over a span of about three months, silver price has dropped by close to 30%. The plunge has been triggered by its status as a precious and industrial metal in equal measure.
Precious metal status
To begin with, a strong US dollar and hawkish Fed stance has been weighing on precious metals. Traditionally, this group of commodities are considered a safe haven in times of economic and geopolitical turmoil. Indeed, the Russia-Ukraine war boosted silver price to a 9-month high in early March. At the same time, gold was trading at its highest level since August 2020.
However, amid the Fed’s aggressive tightening of its monetary policy and subsequent recession fears, the US dollar appears to be the safe haven of choice. As at the time of writing, the dollar index, which tracks the value of the greenback against a basket of six major currencies, was $106.13. Earlier in the day, it hit a high of $106.27; its highest level since December 2002.
As the same time, interest rate hikes by the Fed have further weighed on silver price. In June, the central bank approved a supersized hike of 0.75% and may enact a similar increase in July.
Similar to other industrial metals such as copper and iron, silver is under pressure from the negative demand outlook. To begin with, China, the leading consumer of industrial metals in the world, has continued to grapple with the Omicron coronavirus variant.
Data released late last week showed that the Caixin manufacturing PMI rose to 51.7 in June; the first expansion in four months. This followed the easing of COVID-19 restrictions in the major cities of Beijing and Shanghai.
The surge in coronavirus cases in other parts of China has heightened concerns over the demand of industrial metals. On Monday, the province of Anhui reported 231 new cases. The Yangtze Delta area, which accounts for about a quarter of the country’s economy, has had the virus spread rapidly. Jiangsu province, which is the second-largest contributor of the nation’s economic output, recorded 66 cases on Monday.
In addition to the situation in China, slowed global economic growth at a global level has also contributed to the decline in silver price. Data released by the London Bullion Market Association (LBMA) showed that silver supply has rebounded at a faster pace compared to its demand.