Silver Caught in a Vise: Geopolitical Crisis Meets the Most Divided Fed in Decades

Silver hits three-week low near $72 as historic supply deficit clashes with a deeply divided Fed and the Strait of Hormuz blockade, keeping prices in limbo.

The silver market is experiencing a peculiar kind of paralysis. On Thursday, the white metal touched a three-week low near $72 an ounce, a level that reflects the tug-of-war between a historic supply deficit and the most fractured US central bank in over three decades.

May silver futures opened marginally lower before staging a partial recovery above $74 during the session, but the underlying tension is unmistakable. The metal is being pulled in opposite directions by forces that rarely align: a geopolitical shock of unprecedented proportions and a monetary policy outlook that has turned decisively hawkish.

The Hormuz Stranglehold

The source of the volatility traces back to the Persian Gulf. Since late February, the Strait of Hormuz has been effectively sealed off amid the military confrontation involving the US, Israel, and Iran. Before the blockade, roughly a quarter of the world's seaborne oil trade passed through this narrow channel. Now, Brent crude has shattered the $120-a-barrel barrier overnight.

The International Energy Agency has described the disruption as the largest supply shock in history, with roughly 20% of global oil flows cut off. President Trump has maintained the naval blockade against Iran, demanding Tehran agree to a nuclear deal, while Iran accuses Washington of economic blackmail.

In normal circumstances, such an energy crisis would be a powerful tailwind for precious metals. Investors typically flock to gold and silver as hedges against the inflation that inevitably follows a spike in oil prices. But these are not normal circumstances.

A Fed at War With Itself

The problem for silver lies in the Federal Reserve's response to that very inflation. The central bank left its benchmark rate unchanged at a maximum of 3.75% at its latest meeting, but the vote revealed deep fractures. The decision passed by a margin of 8 to 4 — the most divided vote since 1992.

Three dissenters pushed for an explicit signal of tighter policy, while the broader committee signaled that the inflation peak has yet to arrive. Fed Chair Jerome Powell presided over what was his final rate-setting meeting, with his designated successor Kevin Warsh awaiting Senate confirmation.

The market has priced out any chance of rate cuts until at least September, according to the CME FedWatch Tool. Investors now see roughly an 80% probability that borrowing costs will remain elevated through the end of 2026. Some scenarios even contemplate a rate hike stretching into 2027.

For silver, which carries no yield, this is a punishing dynamic. Higher interest rates make fixed-income alternatives more attractive, undermining the metal's traditional appeal as an inflation hedge. Reports of possible new US military operations to reopen the waterway only add to the market's jittery mood.

The Supply Floor That Won't Break

Yet beneath the daily noise of geopolitics and monetary policy, a structural story is playing out that prevents silver from falling further. The market is heading into its fifth consecutive year of deficit. Over the past five years, the cumulative shortfall has reached 820 million ounces.

The Silver Institute projects a sixth consecutive supply deficit for 2026, with a shortfall of more than 46 million ounces — significantly above the previous year's level. A major driver is the photovoltaic industry, which consumes more than 230 million ounces annually for global solar expansion.

This fundamental scarcity provides a floor beneath the price, even as the Fed's hawkish stance caps any upside. The metal remains trapped in a narrow trading range between industrial shortage and monetary tightening.

What Comes Next

Year-to-date, silver still trades more than 127% higher despite the recent pullback. But the path forward hinges on two variables: the duration of the Hormuz blockade and the trajectory of US interest rates.

Once Warsh takes the reins at the Fed in May, the monetary policy landscape will be recalibrated. If the oil shock proves more persistent than anticipated, the central bank may have no choice but to keep rates elevated for longer, applying continued pressure on the precious metal. Until then, silver remains caught between a supply crisis that should push prices higher and a rate environment that refuses to let them.