Silver's 5.6% Drop to $64.09: Fed Rate Bets and Middle East Flare-Up Meet a Market Still Standing Above Its 50-Day Line

Silver slid 5.6% to $64.09 as Middle East escalation lifted inflation fears and Fed hike odds rose to 69.4%, even as physical demand stays firm.

Silver bulls got a harsh reminder Thursday that macro forces can overwhelm even the tightest physical market. The white metal settled at $64.09 an ounce, down 5.6% in a single session, as a fresh escalation between Washington and Tehran collided with mounting expectations that the Federal Reserve will tighten policy next week.

The trigger was a US military strike on an island in the Strait of Hormuz on Wednesday, which drew immediate retaliation from Iran against the United Arab Emirates and Jordan. Energy prices jumped on the news, reigniting inflation worries and handing the Fed yet another argument for a firmer stance — typically a negative for non-yielding assets like silver and gold. Higher rates raise the opportunity cost of holding metal that pays no coupon, a mechanism that goes a long way toward explaining the current selloff.

Rate-Hike Odds Jump as Inflation Data Loom

Traders have taken the signal seriously. According to the CME FedWatch Tool, the probability assigned to a Fed rate hike at next week's meeting has climbed to 69.4%, up sharply from 62.2% just a day earlier. The central bank's gathering runs September 15–16, and before that, markets will digest the August consumer price report due later today — a release widely seen as the key catalyst for whether policymakers actually follow through on the priced-in move.

Adding fuel to the fire, Fed Chair Warsh said there is still "work" to do in the fight against inflation. Producer prices for August came in at 5.4%, above the 5.3% consensus, with energy costs tied to the Middle East standoff doing much of the heavy lifting.

The damage extends beyond Thursday's session. Silver is down 4.1% on the week and 9.2% year to date. The metal now trades just above its 50-day moving average of $63.15 — a gap of only 1.5% — while sitting well below its 200-day average of $73.87, a sign that the medium-term trend has tilted lower.

Physical Tightness Tells a Different Story

Strip away the macro noise, and the picture in the physical market looks considerably firmer. COMEX warehouses held 338.1 million ounces at the start of September, but only 99.4 million of that was registered — the portion actually available for delivery against futures contracts.

Demand for real metal has not blinked. Roughly 4,904 futures contracts were issued or accepted at the start of the month, equivalent to about 24.5 million ounces of physical silver. Open interest in the December contract alone tops 86,000 positions, out of total volume of around 104,400 contracts — a clear sign of heavy positioning ahead of the Fed decision.

That divergence between paper and physical markets is a familiar pattern: speculative flows react to rate expectations, while structural demand from industry and investors stays put.

A Supply Gap That Keeps Widening

The longer-term fundamentals remain supportive. The global supply deficit, now in its fifth consecutive year, is projected by the Silver Institute and Metals Focus to widen to 46.3 million ounces this year, up from 40.3 million ounces in 2023.

Demand, though, is a mixed bag. Industrial silver consumption has fallen to a four-year low of 650 million ounces, largely because the photovoltaic sector is shifting toward more frugal processing techniques as prices stay elevated. Jewelry demand has also weakened, led by a roughly one-fifth decline in India as record rupee prices kept buyers on the sidelines.

What to Watch Next

Everything now hinges on the Fed. A confirmed hike would likely keep silver under pressure in the near term, while a more moderate outcome than expected could spark a swift rebound — particularly given the structural supply squeeze lurking beneath the surface.

The trading range remains unusually wide, spanning from a 52-week low of $41.33 to a high of $121.78, a corridor that captures just how much uncertainty is still coursing through the futures market.