Silver prices to fall to $21 as Fed tightens rates to fight inflation - UBS
(Kitco News) - The Federal Reserve's imminent move to raise interest rates by 50 basis points next week continues to take its toll on the precious metals.
Silver has been a significant underperformer in the last two weeks as prices dropped below $26 an ounce. Silver is currently testing support just above $23 and is down 13% since April 18.
Looking ahead, analysts at UBS expect to see lower prices in the near-term. May silver futures last traded at $23.040 an ounce.
"Prospects of higher interest rates are likely to remain a headwind for the metal," said Dominic Schnider and Wayne Gordon, market strategists at UBS said the report. "A silver price whose upside is likely to be capped gives investors the opportunity to engage in more active strategies. In short, we like selling the price upside in silver for yield."
The Swiss investment bank is negative on silver as the Federal Reserve tries to get inflation under control by aggressively raising interest rates. They added that interest rates have room to move much higher through 2022.
"The Federal Reserve is in inflation-fighting mode for good reason. Elevated inflation readings in the US are a problem that requires the Fed's full attention. We think this means real interest rate expectations have room to march higher. In the case of the 10-year US TIPS yield, a move into positive territory marks our base case," the analysts said.
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Not only are interest rates expected to move higher, but UBS also looks for inflation pressures to start to ease by the second half of the year.
"With real interest rate expectations on the rise and actual inflation leveling off in the coming months while economic growth moderates, the backdrop for a silver price rally is diminishing," the analysts said. "As a result, we expect inflows into silver ETFs to stall and start to reverse once signs become clearer that inflation is rolling over more materially. For the silver price, this means that a sideways trajectory in 2Q is most likely to be followed by a step down, with the metal heading toward USD 21/oz."