Silver (XAG/USD) rose after two sessions of declines, changing hands near $64.00 per troy ounce in Asian trading. Prices rebounded from an 11-week low of $61.50 hit earlier on Thursday, reflecting silver’s dual role as a monetary safe-haven and an industrial input, even as risk sentiment remained fragile. Upside appeared constrained as the US carried out a second day of airstrikes against Iran, raising the prospect of a prolonged Middle East conflict and adding to inflation concerns.
The US said the “self-defense” strikes followed the downing of an American helicopter, after which Iran launched retaliatory attacks on US facilities in Bahrain, Jordan and Kuwait. US Central Command confirmed the start of strikes in Iran on Wednesday, while President Donald Trump warned of severe military action if an interim peace deal is not finalised. On the macro side, May US inflation rose at its fastest pace in over three years on higher energy costs, though in line with expectations; markets pared back Federal Reserve tightening bets, yet a December quarter-point hike remains fully priced in, with attention turning to May PPI and Initial Jobless Claims.
Safe-Haven Demand Versus Hawkish Fed
We see the current silver market as being pulled between two powerful forces, creating a tense trading environment for the weeks ahead. The escalating conflict between the US and Iran provides a strong tailwind for silver’s safe-haven status, which explains the rebound from its recent lows. However, this is clashing with the reality of a hawkish Federal Reserve committed to fighting inflation, which strengthens the US dollar.
This tug-of-war points towards increased volatility, making this a prime environment for options traders rather than those taking simple directional bets. We believe strategies that profit from price movement itself, such as purchasing long-dated straddles, could be effective. Selling covered calls against existing positions may also be prudent to generate income while upside potential appears capped by monetary policy.
Historical Precedents, Industrial Demand, and Market Outlook
Historically, military conflicts in the Middle East cause an initial, sharp flight to safety in precious metals that often fades if the conflict does not broaden. For example, after the US strike on an Iranian general in January 2020, both gold and silver spiked for about a week before retracing as fears of a full-scale war eased. We expect a similar pattern could unfold if the current airstrikes remain contained and do not escalate into a wider regional war.
Underpinning the entire market is silver’s incredibly strong industrial demand, which should provide a solid price floor. Projections from The Silver Institute show industrial consumption is on track for a record year, with demand from the solar panel and 5G technology sectors growing by over 15% annually. This fundamental demand provides a strong cushion against any sharp sell-offs driven by macroeconomic fears.
Still, the primary headwind is the Federal Reserve’s policy, which is limiting any significant rally. With May inflation hitting a three-year high, the market is convinced the Fed will act, and data from the CME FedWatch Tool confirms that a December rate hike is over 90% priced in. This expectation will likely keep the US dollar firm, acting as a constant drag on silver prices.
We are also closely watching the gold/silver ratio as an indicator of relative value. The ratio has recently been hovering around 85, well above its historical average of approximately 60. Should geopolitical fear drive gold up faster than silver and push the ratio towards 100, we would see this as a signal that silver has become significantly undervalued and poised to outperform.
