I have never really bought the argument about the dollar and gold (GLD). Yes, many years ago there was a relationship between gold and the dollar, but that was because the world monetary system was different. Today, the amount of money in circulation has nothing to do with gold. Look at Japan -- it has been printing overtime for many years now, as well as all of Asia. Why does gold have to be a function of U.S. dollar printing, and not a function of international money printing? Funny enough, gold bulls never really mention money printing in the rest of the world.
Either way, the reason why gold and silver (SLV) will go up or down is demand. Is does not matter where this demand is coming from. Demand is demand, and at the margin increased demand will raise prices. Demand destruction, on the other hand, will take prices down.
Click to enlarge image.
The chart above comes from the World Gold Council, the officially lobbying group for all things gold. As its figures show, demand for gold was down across the board in Q4 2012 year over year, with the exception of jewelry, which posted a 12% gain. However, demand from technology, investment, and even official sector purchases were down.
In fact, if we look at Q1 2013, investment demand was a whopping 50% lower vs. Q4 2012. Something else to keep in mind is this: Investment demand makes up 21% of total demand. At the margin, if you strip out 50% of investment demand, that comes out to a 10% total loss in demand for gold. While this is demand that could be made up somewhere else, the truth of the matter is that so far it hasn't. As far as when investment demand will come back, for the time being this does not seem to be in the cards.
In a recent poll taken by Credit Suisse, over half the 185 commodity investors that participated in the poll believe that gold will be lower than $1,400 an ounce by the end of 2013. Societe Generale believes that gold holdings through exchange-traded products will probably decrease by another 285 metric tons in 2013. Societe Generale believes that gold prices will average $1,200 an ounce in Q4 2013. The firm had previously forecast a drop to $1,375 by the end of the year.
I don't know when investment demand for gold and silver will come back. But unless it comes back, prices at the margin will continue to fall. For how long and were prices will bottom is anyone's guess, but I think the $1,200 mark that Societe Generale mentioned is as good a guess as any. Finally, jewelry purchases from India (or China for that matter) are not enough to offset current investment outflows, in order for demand to increase enough for gold and silver prices to start rising again. That will only happen when investment demand and investment demand alone for gold and silver revives.