Silver has both financial and industrial attributes, with its price elasticity significantly higher than that of gold. The current market is in a game window between macro tightening expectations and long-term physical shortages. The stickiness of U.S. inflation and the resilience of employment support the Federal Reserve”s expectation of “higher interest rates for longer”, while the strong short-term U.S. bond yields and the high and volatile U.S. dollar index are the core factors suppressing silver prices. In addition, the Silver Institute predicts that there will be a global supply-demand deficit of silver for the sixth consecutive year, but the decline in silver demand for photovoltaic power generation, coupled with the continued reduction of positions by speculative funds’ long positions, has weakened the support from the industrial side.<\/p>\n
In the short term, the rebound in inflation has heated up market expectations for Fed rate hikes, and silver prices, affected by real interest rates and the U.S. dollar index, are likely to continue their weak and volatile trend. In the medium to long term, supply and demand deficits, long-term demand in the new energy sector, the spillover effect of central bank gold purchases, and geopolitical risks will provide bottom support for silver prices.<\/p>\n
U.S. CPI Exceeds Expectations<\/p>\n
In September, the U.S. CPI rose by 0.6% month-on-month, hitting the largest increase in half a year; it was up 3.7% year-on-year, the highest level in four months. Excluding the volatile food and energy prices, the U.S. core CPI rose by 0.3% month-on-month in September, higher than the market expectation of 0.2% and flat from the previous reading; it was up 2.6% year-on-year, exceeding the market expectation of 2.5%. Energy was the direct driver of this round of increase, with energy prices surging 20.4% year-on-year that month. However, the price stickiness after excluding energy is more worthy of attention: the housing sub-index rose to 3.2% year-on-year, accounting for about half of the core CPI increase, while sub-indices such as transportation, medical care and education all strengthened, showing that energy costs have gradually been transmitted to service prices. U.S. retail sales rose by 0.8% month-on-month in September, higher than the expected 0.3%, with gas stations contributing about 71% of the incremental growth. Excluding sales from motor vehicles and parts and gas stations, retail sales rose by 0.2% month-on-month in September. The current U.S. economy is not overheating across the board; instead, there is a coexistence of nominal growth driven by rising energy prices and a contraction in real purchasing power. This pattern both supports expectations of interest rate hikes and is difficult to serve as a realistic foundation for the expansion of industrial demand.<\/p>\n
A December rate hike has become the base case for the market, and the subsequent focus of the game will shift to the post-meeting statement. According to CME’s “Fed Watch” data as of October 26, the probability that the Federal Reserve will keep interest rates unchanged in October is 90.6%, the probability of a cumulative 25 basis point rate hike in December is 69.1%, and the probability of a 50 basis point rate hike is 6.9%. It is expected that the Federal Reserve will “stand pat” in October and implement a rate hike in December. It is worth noting that the October meeting itself has limited impact, and the real variable is Federal Reserve Chairman Waller’s statement on the inflation and interest rate path after the meeting. Current financial conditions have tightened spontaneously at the market level, and the rise in yields and widening of credit spreads have had a substantive tightening effect on the market. Therefore, the Federal Reserve’s “no rate hike” in October does not mean “the bad news is fully priced in”, and we still need to focus on the relevant statements of Federal Reserve officials in the follow-up.<\/p>\n
High Dollar Level Operation<\/p>\n
The yield on the 10-year U.S. Treasury note rose from around 4.15% at the beginning of the year to 5.3% in early October, hitting a new high since 2002. Subsequently, driven by safe-haven buying, it fell below 5% on October 22, ending a 19-consecutive-day trend of remaining at or above 5%. In the short term, the logic driving the rise in yields is hard to reverse. It is expected that the 10-year U.S. Treasury yield will fluctuate at a high level of 5.0%-5.5% in the fourth quarter, corresponding to a real interest rate of over 2%, which keeps the holding cost of silver high and is an important factor suppressing its valuation.<\/p>\n
The relative resilience of the U.S. economy compared to non-U.S. economies, the expectation of short-term yields remaining at high levels, and geopolitical conflicts potentially triggering safe-haven buying at any time all collectively support the U.S. dollar. However, the rise in long-term yields stems more from fiscal risks, which may somewhat erode the attractiveness of U.S. dollar assets. Non-U.S. central banks are continuing their high-interest-rate cycles, leaving limited room for further expansion of interest rate differentials. Meanwhile, the uncertainty surrounding the U.S. general election has also dampened the sustainability of the bullish trend in the U.S. dollar. Overall, it is difficult for the U.S. dollar to embark on a unilateral trend and it will mainly trade in a wide range of fluctuations at high levels. Only when inflation and employment data show a significant weakening, leading to the early realization of rate cut expectations, will the U.S. dollar start a trend of decline, and only then will the macro pressure on silver be substantially alleviated.<\/p>\n
Fundamental Situation<\/p>\n
Silver is a precious metal with a high proportion of industrial attributes, where industrial demand accounts for more than half of the total demand. Photovoltaics, electronics and electrical engineering, new energy vehicles, and conductive materials are the main sources of incremental demand. Meanwhile, mine supply has low elasticity, and there are long-term constraints on supply. The Silver Institute predicts that mine production will only grow slightly by about 1% in 2026, with limited incremental volume. On the demand side, photovoltaics are the largest component of silver’s industrial demand. In the long run, the silver consumption per unit of global photovoltaic installed capacity is gradually declining, which is the key reason for the weakening of the silver industrial demand logic. The Silver Institute forecasts that global silver will maintain a supply and demand gap for the sixth consecutive year in 2026, with a gap of approximately 46.3 million ounces, and the long-term supply and demand gap provides bottom support for silver prices. However, global silver consumption for photovoltaics is expected to drop to approximately 151 million ounces, a year-on-year decrease of about 19%, which is the largest annual decline on record.<\/p>\n
Overall, the stickiness of U.S. inflation remains, and the Federal Reserve will maintain high interest rates. Coupled with the fluctuating U.S. dollar at a high level and the high real yield of U.S. bonds, the macro pressure has not abated, and the fundamental lacks a strong driver. The Shanghai silver price may continue its weak and volatile trend in the short term. For the follow-up, focus on the FOMC meeting on October 27-28 and the PCE data on October 29.<\/p>\n