XAG/USD rises to near $31.50 on rising geopolitical tensions

• Silver price gets support from refuge flows amid escalating Middle East tensions.
• Non-yielding silver could be adversely affected by prolonged high rates as the declining likelihood of a Fed rate cut reduces its appeal.
• A decline in China’s manufacturing activity could have limited the positive impact of fiscal and monetary stimulus on silver demand.

The price of silver (XAG/USD) extended its gains for a second straight day, trading around $31.50 per troy ounce during European hours on Wednesday. The upside in silver prices is attributed to refuge flows amid escalating geopolitical tensions in the Middle East.

Iran fired more than 200 ballistic missiles at Israel on Tuesday, shortly after the US warned that a strike was imminent. The Israel Defense Forces reported that several of the rockets were intercepted, while reports indicated that one person was killed in the West Bank, according to Bloomberg.

Israeli Prime Minister Benjamin Netanyahu vowed to retaliate against Iran following a missile attack on Tuesday. In response, Tehran warned that any counterattack would lead to “vast destruction”, raising concerns about the potential for a wider conflict.

On Tuesday, the weaker-than-expected ISM Manufacturing PMI left room for the US Federal Reserve (Fed) to continue cutting rates. The index came in at 47.2 for September, matching the reading with August’s print, but coming in below market expectations of 47.5. However, Fed Chairman Jerome Powell said on Monday that the central bank was in no rush and would gradually cut its benchmark rate “over time”.

The CME FedWatch tool indicates that markets assign a 62.7% probability of a 25 basis point rate cut by the Federal Reserve in November, while the probability of a 50 basis point cut is 37.3% , down from 57.4% a week ago. Higher interest rates keep the opportunity cost of holding non-yielding assets like silver higher, making it less attractive to investors looking for more attractive, yield-bearing alternatives.

Silver demand has been supported by China’s fiscal and monetary stimulus, particularly benefiting industrial applications in one of the world’s largest manufacturing hubs. However, weaker-than-expected demand growth in China, compounded by data pointing to a slowdown in manufacturing activity, may have limited the gray metal’s upside potential.