During Tuesday's Asian trading session, spot silver gave back some of its gains after two consecutive days of advances, hovering around $65.30 per ounce. The fading prospects for a US-Iran peace deal have amplified geopolitical uncertainties, yet silver has failed to benefit from its safe-haven appeal. Instead, concerns that rising energy prices could stoke inflationary pressures have reinforced expectations that the Federal Reserve will maintain its hawkish stance, creating headwinds for the yield-free metal. However, soft US employment data and subdued inflation have significantly reduced the market's expectations for a September rate hike, a factor that could still offer medium-term support for silver prices.

Geopolitics: The US-Iran Agreement Collapses, Creating a Battle Between Haven Demand and Inflation Fears

Former President Donald Trump has made it clear he has no intention of extending the temporary peace agreement with Iran, citing the US naval blockade of Iranian ports as evidence of Washington's leverage. He has also reiterated his stance on declaring the Strait of Hormuz as US territory under complete American control. On the other side, Iranian Foreign Ministry spokesperson Baghaei pointed out that the agreement remains elusive due to the complex security environment and "obstructive actions by disruptive elements," insisting that the US must first lift the blockade. The firm rhetoric from both sides has dimmed the prospects for any deal, keeping the geopolitical risk premium on the Strait of Hormuz elevated. In theory, geopolitical tensions should be a tailwind for haven assets like gold and silver, but the current transmission mechanism is more complex. Concerns that persistently higher energy prices could reignite inflationary pressures might compel the Fed to maintain or strengthen its tightening stance, which acts as a headwind for the yield-free metal. Consequently, the impact of geopolitical risk on silver prices is a "two-way tug of war."

Fed Expectations: Rate Hike Bets Cool Significantly, Providing a Floor for Silver

Despite the short-term pressure from geopolitical-induced inflation worries, US macroeconomic data is building another layer of support for silver. The surprisingly weak July non-farm payrolls report, coupled with the moderate inflation reading released last week, has notably dampened market expectations for a rate hike next month. According to the CME FedWatch tool, the probability of a September hike has dropped to 35%, down from 47% just a month earlier. Market attention is now fixed on the upcoming release of the Fed's July meeting minutes for further clues on the future policy path. Strategists at TD Securities point out that a confluence of macroeconomic factors has driven significant positioning adjustments in the precious metals market. The firm notes that "benign inflation, a weak US employment environment, limited market concern over another sharp oil price surge, and silver's convincing move into a higher trading range have all prompted fund managers to aggressively increase their long gold exposure." This macro backdrop provides support for precious metals, and silver is well-positioned to benefit.

Institutional Perspectives

In its mid-August research note, Citi maintained its 3-month price target of $75 per ounce while anchoring its 6-to-12-month target at $90, implying roughly 40% upside from the then-prevailing price of around $64. The bank noted that industrial demand, particularly in the solar sector where thinner wafers and new technologies have reduced silver usage per unit, remains relatively soft. However, this is expected to be offset by stronger investment demand. Silver, with its high-beta characteristics, will continue to follow gold directionally. Should the Strait of Hormuz crisis de-escalate quickly between September and December, combined with a dovish pivot from the Fed, it would significantly weaken the two major headwinds of rising real yields and a stronger dollar. Citi also emphasized that the global silver market is expected to remain in a supply-demand deficit until 2027, with rigid demand from AI data centers, 5G infrastructure, and electric vehicles providing ongoing support. Overall, Citi views silver as an asset combining gold's safe-haven qualities with greater price elasticity, suggesting that in an improved geopolitical and monetary policy environment, silver prices could embark on an independent upward trajectory. However, they caution against the potential long-term structural impact of solar technology shifts on demand.

UBS's latest forecast, despite silver's notable near-term pressure, anticipates a gradual market recovery: a September target of $65, a year-end target of $70, and a rise to $75 by March and June 2027. This implies more than 30% upside from the recent lows, but the path is likely to be gradual rather than a swift return to historical highs. The bank believes silver's stronger industrial attributes make it more sensitive to global growth, manufacturing demand, and financial conditions, leaving it vulnerable in the short term to a stronger dollar and higher real interest rates. However, once the monetary and investment environment improves, prices are expected to recover in tandem with gold. UBS maintains that the structural deficit has not fully disappeared, and the current weakness reflects macro and sentiment factors rather than a fundamental reversal in supply-demand dynamics. The bank remains constructive on silver's medium-term outlook, expecting prices to move higher once conditions warm up.

Summary

Silver is currently caught in a dual game between geopolitical forces and monetary policy expectations. The escalating US-Iran standoff directly boosts haven demand on one hand, while fueling inflation concerns through the energy price channel on the other, which paradoxically reinforces expectations of continued Fed tightening and pressures silver prices. However, the weak US employment data and benign inflation environment have significantly reduced the odds of a September hike, providing a floor for silver. This week's FOMC meeting minutes will be the key catalyst to break the current deadlock between bulls and bears.