Silver's Perfect Storm: A Supply Squeeze From China Collides With a Hawkish Fed

The silver market is caught between two powerful, opposing forces. While the Federal Reserve's decision to hold interest rates steady is weighing on investor appetite for the precious metal, a looming supply shock from China threatens to upend the physical market entirely.

The Fed's Firm Stance

The US central bank left its benchmark rate unchanged at 3.50 to 3.75 percent on Wednesday, a move that was widely anticipated. The CME Group's FedWatch Tool had assigned a 99 percent probability to the pause. For silver, which offers no yield, the prospect of elevated borrowing costs for an extended period is a clear headwind.

Jerome Powell's latest press conference is expected to be his last, with Kevin Warsh already designated as his successor. The macro environment remains challenging: Brent crude traded above $111 per barrel on Tuesday, driven by the blockade of the Strait of Hormuz amid escalating tensions in the Middle East. Surging energy prices are fanning inflation fears, reinforcing expectations that central banks will maintain a restrictive posture.

Traders have now completely written off any rate cuts for the current year. The dollar index, meanwhile, has climbed to a three-week high, making dollar-denominated silver more expensive for buyers outside the US and further dampening demand.

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A Structural Supply Shock

Away from monetary policy, a serious supply problem is brewing. China will halt its sulfuric acid exports starting in May, with the ban expected to remain in place until the end of the year. The move hits the global metals industry hard.

The connection to silver lies in copper mining. Roughly 70 percent of annual silver output is produced as a byproduct of copper operations. These mines depend on sulfuric acid for their production processes. Key importing nations such as Chile and Indonesia are now under pressure, and seaborne trade in sulfur is already suffering from the Iran conflict. Spot market purchases could become up to 60 percent more expensive. The result: major copper producers are worried about their output volumes in the second half of the year.

A Market Already in Deficit

These supply concerns are hitting a market that is already structurally tight. Silver demand is expected to outstrip supply for the sixth consecutive year. Physical investment alone is growing strongly, and China is buying up the market at an extraordinary pace.

In March, the country imported 836 tonnes of silver — nearly three times the usual monthly average and a record high. At the Shanghai Gold Exchange, buyers are paying significant premiums over the global spot price. The industrial side is also robust, particularly from the solar sector, which continues to drive strong demand.

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Consolidation and the Outlook

After hitting an all-time high of $121.64 in January, silver has been consolidating. A strong dollar and rising bond yields have triggered profit-taking, and the metal has lost roughly ten percent over the past two weeks. On Tuesday, it fell to a one-month low. Technically, silver is trading below its 20-day EMA, with the RSI at around 41 — indicating downward momentum but not an oversold condition. Analysts see initial support at $68.

The gold-to-silver ratio currently stands at 60. In the near term, geopolitics remains the key price driver. An open sea route through the Strait of Hormuz would lower oil prices, easing inflation expectations and paving the way for rate cuts. That would give silver fresh momentum. For now, however, the market is waiting to see whether the selling pressure eases or the metal slides further toward the $68 mark.

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