Silver (XAG/USD) ended a five-day rise, dropping over 2.5% to about $73.80 per troy ounce in Asian trading on Monday. Demand eased as rising energy costs increased inflation concerns and raised the chance of delayed rate cuts or tighter policy by the Federal Reserve and other central banks.
West Texas Intermediate (WTI) started the week with a bullish gap, up about 7.5% near $97.10 per barrel. Oil prices rose amid renewed tension between the United States and Iran linked to the Strait of Hormuz.
Oil Shock And Inflation Fears
US President Donald Trump said the US would begin blockading ships entering or leaving the Strait of Hormuz after peace talks in Islamabad failed. US Central Command stated the blockade of maritime traffic to and from Iranian ports would start at 10 AM ET (14:00 GMT) on Monday.
US inflation data also supported expectations of higher interest rates for longer. The Bureau of Labor Statistics reported annual CPI at 3.3% in March, up from 2.4% in February, with monthly CPI at 0.9% versus 0.3% previously.
Core CPI rose 0.2% month-over-month and 2.6% year-over-year. The data were released on Friday.
With the Strait of Hormuz effectively closed, we are expecting a dramatic surge in market volatility across all asset classes. Options traders should prepare for significantly higher premiums, meaning selling strategies could become attractive, but the directional risk is extreme. Looking back, the CBOE Volatility Index (VIX) more than doubled to over 36 in the two weeks following the geopolitical shock in February 2022, and we could see a similar move now.
The immediate reaction for energy derivatives is to position for higher prices, as a blockade of this importance creates a major supply crisis. We should consider buying call options on WTI crude futures to capture further upside while defining our risk. We saw in 2022 how WTI prices rocketed from around $92 to over $123 a barrel in just two weeks, and this situation could be even more severe.
Equities Precious Metals And Dollar Trades
This combination of an energy shock and a hawkish Federal Reserve is deeply negative for equity markets, so we should be adding bearish positions. Buying put options on the S&P 500 or Nasdaq 100 indices provides a direct way to profit from an expected downturn in stocks. During the oil spike in early March 2022, the S&P 500 fell by over 5% as markets priced in the new economic reality.
Silver’s drop shows the market is currently more worried about high interest rates than geopolitical risk, but this could change quickly. We believe the “safe haven” bid for precious metals is being suppressed for now, making short-term put options on silver seem logical. However, we must remain nimble, as a broader panic could easily reverse this trend and send both gold and silver soaring.
The strong CPI data combined with rising oil prices forces the Fed’s hand, making further rate hikes a real possibility and cementing the higher-for-longer narrative. This strengthens the case for a stronger US Dollar, which acts as a safe haven in global crises. We should look to be long the U.S. Dollar Index (DXY), recalling how it rallied nearly 15% through the Fed’s 2022 hiking cycle.
