Silver (XAG/USD) continues its upward trend for the second consecutive session, hovering around $30.70 during the Asian trading hours on Friday. This rally in Silver price is largely driven by escalating geopolitical tensions. Reports suggest that Russian President Vladimir Putin warned of a possible nuclear-capable ballistic missile strike on Ukraine, following Moscow's recent large-scale attacks on key energy infrastructure.

Meanwhile, a ceasefire between Israel and the Lebanese militant group Hezbollah was successfully maintained on Wednesday, thanks to a deal brokered by the United States and France. This truce has enabled residents to begin returning to their homes. However, Israel is still engaged in military operations against Hamas in the Gaza Strip.

Furthermore, the weakening of the US Dollar (USD) is making dollar-denominated Silver more affordable for buyers with foreign currencies, boosting its demand. Additionally, the US bond market has strengthened after US President-elect Donald Trump selected Wall Street veteran and fiscal conservative Scott Bessent as the US Treasury Secretary.

Markets are closely monitoring upcoming US data for further clues about the Federal Reserve's (Fed) monetary policy direction. On Wednesday, US core PCE prices for October met expectations, keeping investor hopes alive for another rate cut in December. However, other data indicated a resilient economy, suggesting that the Fed may take a cautious approach in the coming year.

According to the CME FedWatch Tool, futures traders are now pricing in a 66.5% probability of a 25 basis point rate cut in December, up from 55.9% a week ago. However, they expect the Fed to keep rates unchanged during its January and March meetings.

Silver FAQs

Why do people invest in Silver?

Silver is a precious metal highly traded among investors. It has been historically used as a store of value and a medium of exchange. Although less popular than Gold, traders may turn to Silver to diversify their investment portfolio, for its intrinsic value or as a potential hedge during high-inflation periods. Investors can buy physical Silver, in coins or in bars, or trade it through vehicles such as Exchange Traded Funds, which track its price on international markets.

Which factors influence Silver prices?

Silver prices can move due to a wide range of factors. Geopolitical instability or fears of a deep recession can make Silver price escalate due to its safe-haven status, although to a lesser extent than Gold's. As a yieldless asset, Silver tends to rise with lower interest rates. Its moves also depend on how the US Dollar (USD) behaves as the asset is priced in dollars (XAG/USD). A strong Dollar tends to keep the price of Silver at bay, whereas a weaker Dollar is likely to propel prices up. Other factors such as investment demand, mining supply – Silver is much more abundant than Gold – and recycling rates can also affect prices.

How does industrial demand affect Silver prices?

Silver is widely used in industry, particularly in sectors such as electronics or solar energy, as it has one of the highest electric conductivity of all metals – more than Copper and Gold. A surge in demand can increase prices, while a decline tends to lower them. Dynamics in the US, Chinese and Indian economies can also contribute to price swings: for the US and particularly China, their big industrial sectors use Silver in various processes; in India, consumers’ demand for the precious metal for jewellery also plays a key role in setting prices.

How do Silver prices react to Gold’s moves?

Silver prices tend to follow Gold's moves. When Gold prices rise, Silver typically follows suit, as their status as safe-haven assets is similar. The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, may help to determine the relative valuation between both metals. Some investors may consider a high ratio as an indicator that Silver is undervalued, or Gold is overvalued. On the contrary, a low ratio might suggest that Gold is undervalued relative to Silver.

Source: FXSTREET

An important reason for our house view that the global structure of interest rates will be higher going forward than it was pre-pandemic relates to the balance between saving and investment. A range of forces are pointing in the direction of higher investment, without an obvious counterbalance to boost saving at the same time. Among these forces are the energy transition and energy-intensive new technologies, including AI with its high compute requirements.

In a note earlier this week, Westpac Economics Senior Economist Pat Bustamante highlighted that some of that shift to higher investment is already evident in the Australian data. The industries that are most involved in the energy transition and the adoption of leading technologies are already increasing new investment, especially in software and other so-called ‘intangibles’.

As Pat also observed, there are two implications of these transitions that are not immediately obvious. First, the shift to a more services-based economy, away from traditionally capital-intensive industries such as manufacturing, does not necessarily mean that business investment is lower. Second, and relatedly, new investment is increasingly in the types of capital with higher rates of depreciation and obsolescence than traditional physical plant and machinery. Businesses must ‘run harder to stay in place’, lest their capital stock starts to diminish. Industries that are not obviously capital-intensive nonetheless may need to invest intensively. Pat’s note shows that, as an economy, Australia’s depreciation rate is rising, and has been for some decades.

To the extent that new investment adds to the capital stock and improves its quality, we can expect some payoff in the form of higher productivity and output growth. But the investment that is replacing existing capital is simply covering depreciation. While some of the new technologies may fall into the first category of productivity-enhancers, much of the investment into the energy transition is pure replacement of existing capital stock – effectively an accelerated depreciation. In this respect, there is a bigger payoff to investments that make other activities more energy efficient than to those simply replacing existing generation and distribution infrastructure.

Investing to replace depreciated capital or execute the energy transition is still worth doing. The costs of not doing so are large. But if the economy-wide depreciation rate on the capital stock has risen, this has other implications that are perhaps not widely understood.

To the investors go the spoils

If a higher depreciation rate partly occurs because of higher rates of technical obsolescence – as you’d expect with increased usage of software-based innovation, for example – then new investment introduces different types of capital. New skills may be expected of the workers using the newly-installed capital. More generally, if the optimal mix of labour skills and capital changes as new capital replaces old, then a faster rate of technical change and obsolescence means a faster rate of churn in the kinds of jobs available.

We saw the same thing happen in the first wave of the software revolution. The adoption of PCs and later the internet accelerated obsolescence rates, as did the increased integration of software elements into traditional physical capital. The result was increased physical churn in the capital stock, but also in the skills needed of workers. This lowered the bargaining power of workers and shifted some of the share of income from production away from wages towards profits, especially in countries where there were also barriers to entry for new firms.

Or at least, this is one of the possible explanations of the upward trend in the profit share (downward trend in the wage share) seen in a range of industrialised economies from about the mid-1980s to just before the Global Financial Crisis. And nearly two decades after proposing that explanation in a paper I wrote with former RBA colleague Kathryn Smith (partly based on prior work by Hornstein, Krusell and Violante, subsequently published here), it’s still the explanation that I think makes most sense. To be fair, there are other hypotheses that also fit some aspects of the data, but the hypothesis in that paper explains the timing and cross-country pattern in the trends, in a way that some other explanations do not.

In particular, the nexus between capital obsolescence rates, labour market churn and income shares helps make sense of the end of that upward trend in the profit share in the mid-2000s. Across advanced economies, the post-GFC period was one of low private investment, low productivity growth – and little apparent trend in the profit and wage shares. In Australia, for example,

RBA analysis shows that the profit share outside mining has been broadly flat for two decades. This fits in with the idea that the earlier upward trend in the profit share was at least partly explained by the wave of adoption of an earlier generation of IT products, and that by the mid 2000s, this wave had matured.

If we are indeed on the cusp of a period of faster replacement of existing capital, and some of that demands new skills of workers, it’s possible that we will see this trend increase in the profit share (decline in the wage share) resume. That might be good for productivity growth, but it is not guaranteed that real wages growth will keep pace.

At the least, it is a reason to be cautious about wages forecasts and avoid being too bullish. This is especially so in a country like Australia, where wages growth undershot official forecasts for years, even with a flat trend in the share of wages in national income.

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $68.85 on Friday. The WTI price steadies as the escalation in the Russia/Ukraine conflict offsets a less aggressive rate cut expectation from the Federal Reserve (Fed). Oil traders will closely monitor the developments in the Russia/Ukraine conflict. Any signs of escalation could raise concerns about energy supplies, particularly winter gas flows to Central and Eastern Europe, boosting the WTI price.

On Thursday, Russian President Vladimir Putin said that if Ukraine gets nuclear weapons, Russia will use all means of destruction. Wednesday’s US economic data suggested that the progress on lowering inflation appears to have stalled in recent months, which could diminish the expectation for the Federal Reserve (Fed) to cut interest rates in 2025. However, they expect the Fed will leave rates unchanged at its meetings in January and March. It’s worth noting that slower-than-expected rate reductions would keep borrowing costs high, which could slow economic activity and lower oil demand. 

The Organization of the Petroleum Exporting Countries and its allies (OPEC+) postponed its December meeting, fueling speculation about delayed production hikes and supply adjustments. OPEC+, which accounts for about half of world oil output, is scheduled to meet on December 5 after delaying its earlier meeting. Key considerations include whether to prolong the voluntary production cuts of 2.2 million barrels per day slated to phase out in December. Reports suggest members are considering delaying planned output increases for January amid persistent demand uncertainties.

A further delay has mostly been factored into oil prices already, said Suvro Sarkar at DBS Bank. "The only question is whether it's a one-month pushback, or three, or even longer.”

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil?

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET

Korea's industrial output, retail sales and facility investment dropped from a month earlier in October, data showed Friday, further raising concerns over a potential economic slowdown.

Industrial production went down 0.3 percent last month, marking the second consecutive month of decline, according to the data compiled by Statistics Korea.

Retail sales, a gauge of private spending, also dropped 0.4 percent from a month earlier, marking the second consecutive monthly decline.

Facility investment saw a sharper decline in October, tumbling 5.8 percent from the previous month, largely due to a slump in construction activity.

This marks the first simultaneous decline across all three indicators since May.

"While manufacturing and service sector production remained relatively steady, retail sales showed a decline," said Gong Mi-sook, an official from Statistics Korea. "Facility investment is performing relatively well, but the construction sector is facing significant challenges."

The decline in the output came as the production in the construction sector tumbled 4 percent on-month, and that in the public administration field dropped 3.8 percent.

The output in the construction sector has posted on-month declines for six consecutive months as of October, the longest losing streak since 2008.

In contrast, the service sector posted a 0.3 percent on-month increase, supported by a strong performance in the financial and insurance segments.

In on-year terms, overall industrial output went up 2.3 percent in October.

Retail sales showed a mixed performance. Sales of home appliances and other durable goods fell 5.8 percent from a month earlier in October, offsetting a 4.1 percent increase in semidurable goods, such as clothing.

In on-year terms, retail sales lost 0.8 percent.

Facility investment weakened, primarily due to a downturn in construction-related investments. Construction orders plunged 11.9 percent from a year earlier in October, the data showed.

The finance ministry said the government plans to make every effort to boost economic vitality amid persistent challenges and uncertainties due to factors, such as the incoming U.S. administration (Yonhap)

Source: Koreatimes