Silver’s Industrial Lifeline: ISM Surge Offers Brief Respite Amid ETF Exodus and Fed Hawkish Turn

Silver's 38% correction driven by rate woes and ETF outflows, but a surprise ISM manufacturing surge and industrial demand provide a floor. Geopolitical tensions add uncertainty.

Silver is being pulled in opposite directions. The metal fell sharply from its January record of $121.64 an ounce to trade near $75.88 on Tuesday — a brutal 38% correction that has been fueled by monetary tightening fears, geopolitical turmoil, and a mass exodus from exchange-traded funds. Yet a surprise jump in the ISM manufacturing index injected a dose of industrial optimism, reminding markets that silver’s fate is not solely tied to interest-rate expectations.

Factory Floor Signal Overrides Some Headwinds

The Institute for Supply Management’s purchasing managers’ index for US manufacturing rose to 54.0 in May, up from 52.7 in April and comfortably above analyst forecasts. That marked the strongest reading since May 2022 and triggered an immediate reaction in the silver market. Spot silver climbed about 0.8% in early US trading, while spot gold slipped 0.7% to $4,506.50, pressured by a firmer dollar and 10-year Treasury yields hovering near 4.5%.

The divergence reflects silver’s dual nature. Unlike gold, which responds primarily to monetary conditions, silver has a significant industrial component. The ISM report showed that key sectors — machinery, electrical equipment, primary metals, and electronics — were reporting inventories of customers that were too low, a configuration that typically presages fresh orders. New orders and production sub-indices both remained in expansion territory, reinforcing the narrative of robust factory activity.

Input Cost Pressures Keep the Fed in Play

The same ISM survey, however, carried a sting. The prices-paid index, while easing to 82.1 from 84.6 in April, remains at a level that signals persistent input-cost inflation. Rising steel and aluminum tariffs, petroleum-related cost increases, and import duties were cited as drivers. That keeps expectations of a restrictive Federal Reserve policy front and centre — a heavy weight on a non-yielding asset like silver.

The Fed’s next policy meeting on 16–17 June will be the first chaired by Kevin Warsh, a known hawk. Markets now price in roughly a 60% probability of at least one more rate hike by year-end. With US inflation still at 3.8% as of April, hopes for near-term rate cuts have evaporated. Rising real yields make holding silver more expensive, and the impact is clear: according to UBS analysts, silver ETF holdings have plunged by nearly 70 million ounces to about 794 million ounces.

Hormuz Tensions Add a Geopolitical Edge

Compounding the macro pressure is the Strait of Hormuz. US strikes on Iranian military sites and a retaliatory attack by Iran’s Revolutionary Guards on a US base have effectively closed the waterway. Iran has suspended diplomatic communication with Washington, and talks to reopen the strait have stalled. The standoff is pushing energy prices higher and fuelling inflation fears, which in turn support the dollar and Treasury yields.

For silver, this is a double-edged sword. Higher energy costs raise industrial production expenses, but they also reinforce the inflation narrative that historically benefits commodities. The channel’s net impact will depend on whether the conflict escalates or retreats — a dynamic that the next ISM report, due in early July, may help clarify.

Support Levels and a Supply Story That Can Wait

Technically, silver’s key support zone lies between $70 and $72. A break below that mark — possibly triggered by a disappointing US jobs report or a hawkish Fed surprise — could accelerate the downside. On the upside, $75.70 is the pivot point the metal must reclaim to shift momentum. For now, it remains below that threshold.

Meanwhile, the structural supply story remains intact. The Silver Institute projects a sixth consecutive annual deficit in 2026, estimated at 67 million fine ounces, driven by demand from photovoltaics and AI infrastructure. But that narrative is currently overshadowed by the wave of investor selling. As long as ETF outflows and Fed tightening dominate, silver’s industrial tailwind can only offer a temporary floor — not a lift back to its highs.