Silver prices have eased slightly to $48.80 amidst expectations of further Federal Reserve rate cuts, below the $49 level. Weaker US inflation data and a softer US Dollar support precious metals in the medium term.

Recent US Consumer Price Index data showed that headline inflation rose by 0.3% MoM, below the 0.4% forecast. Markets anticipate a 25-basis-point rate cut at the upcoming Federal Reserve meeting, aiding demand for non-yielding assets like silver.

Meanwhile, the US Dollar remains under pressure, and Treasury yields are lower, maintaining support for precious metals. Market volatility from US political uncertainty and a government shutdown also bolsters demand for safe-haven assets.

Silver’s medium-term outlook is underpinned by easing inflation and possible further Federal Reserve policy adjustments. However, US economic data presents a mixed picture, with strong business activity but declining consumer sentiment.

The S&P Global Composite PMI rose to 54.8, indicating robust growth. However, the University of Michigan survey showed consumer confidence slipped in October.

Investors utilise silver as a hedge during high inflation periods. Silver prices can fluctuate due to geopolitical events, interest rates, and industrial demand, often moving in tandem with gold prices.

With silver consolidating below the $49 level, our immediate focus is on the upcoming Federal Reserve meeting on October 29-30. Current CME FedWatch Tool data shows the market is pricing in a 92% probability of a 25-basis-point rate cut, meaning the decision itself is largely anticipated. The real volatility will likely come from the Fed’s forward guidance and any hints about its December policy.

Given this backdrop, implied volatility on silver options has increased, with the VXSLV index rising over 15% this month ahead of the Fed’s announcement. This makes buying options attractive, as they could profit from a sharp price swing in either direction if the Fed surprises the market. We are considering straddles or strangles to capitalize on this expected increase in volatility post-announcement.

We see strong institutional interest supporting a potential move higher, as holdings in the iShares Silver Trust (SLV) have seen net inflows of over 20 million ounces in the past month. Looking back, this brings total holdings to levels we haven’t seen since the first quarter of 2024. The Gold/Silver ratio, currently at 75, also remains historically high, suggesting silver may have more room to run compared to gold.

However, we must weigh this against robust economic data, like the recent jump in the S&P Global Composite PMI to 54.8. This underlying economic strength could lead the Fed to adopt a more cautious tone, potentially disappointing traders positioned for a very dovish outlook. Recent industrial production data from China also showed a modest increase, which supports industrial demand but reinforces the idea that the global economy is not collapsing.

In the near term, we believe using options to define risk is the most prudent strategy. We will be watching for any resolution to the US government shutdown, as an end to the political uncertainty could reduce silver’s appeal as a safe-haven asset. Protective puts on existing long positions could hedge against a hawkish surprise from the Fed or a sudden improvement in market sentiment.