Silver (XAGUSD) is down by over 3% on Thursday in response to escalating U.S.-Iran tensions that could push oil prices higher.
Iran has said it would call on the Houthi group to disrupt shipping through the Bab el-Mandeb strait if the U.S. attacks Iranian infrastructure. That could pose an issue to energy supply, as the waterway handles roughly 9% of global seaborne oil flows. It could also bring inflation higher. Earlier this week, President Trump said the U.S. would strike Iranian power plants and bridges unless Iran agrees to resume peace negotiations.
Higher Rate Expectations Weigh on Silver
Rate hike odds are on the rise in response to the news. However, silver tends to perform better in lower-rate environments because it doesn’t generate interest income. As yields rise, the opportunity cost of holding silver increases compared to interest-bearing assets like Treasuries. That makes silver ownership less attractive when rates increase.
The Fed is more likely to raise rates when inflation is elevated. By year-end the odds of two rate hikes are at 26.4%, up from 21.7% a day ago, according to the CME FedWatch tool. The odds of three hikes climbed to 6.1% from 4.0%.