Will Gold And Silver Remain In Their Current Holding Pattern?

by: Lior Cohen

The prices of gold and silver rallied in the past couple of weeks to their highest levels in over a month. Are gold and silver on the verge of a comeback? Will their rally continue in the coming months? Let's analyze the latest news that may affect gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) prices.

Despite the recent rally in the prices of gold and silver, the demand for leading precious metals ETFs including SPDR Gold and Shares Silver Trust haven't recovered. During October, the SPDR Gold's holdings fell by 3%; Shares Silver Trust's silver holdings fell by approx. 2.5%. The developments in the U.S economy could shed some light on the drop in demand for gold and silver as investments.

FOMC's monetary policy

The highly anticipated FOMC meeting back in September ended with no change to the Federal Reserve's policy and it continues to purchase long term securities at a pace of $85 billion a month. But even if the Fed had cut its purchase program, this would have had little adverse effect on the prices of gold and silver.

The chart below presents the progress of the U.S money base and the monthly average price of gold between 2010 and 2013.

As seen above, even though the FOMC augmented the U.S money base via its QE3 program in the past year, the price of gold fell. Conversely, back in 2010-2011 when the FOMC launched QE2, the price of gold sharply rose. This figure suggests the expanding monetary policy has had little positive effect on the price of gold in the past year, as opposed to previous quantitative easing plans. This might mean tapering QE3 won't have such an adverse effect on the price of gold and silver. But for now, it seems less likely that the Fed will taper QE3 in the near future.

The recent disappointing U.S non-farm payroll report suggests the U.S labor market isn't progressing fast. One of the factors influences FOMC members to change the current policy is the progress in the labor market. Moreover, the latest government shutdown over the federal budget and the ongoing uncertainty around this issue is likely to keep the Fed maintaining its expanding monetary policy in the coming months.

Demand for gold and silver in Asia

The strong demand for precious metals in Asia, mainly in China and India, is keeping gold and silver prices at their current levels. In India the start of the wedding season is likely to pull back up the demand for gold and silver. Based on the Gold Council quarterly report, during the second quarter of 2013, demand for jewelry in China was up by 54% and in India by 51%. Bar and coin investment grew by 157% in the past quarter in China and by 116% in India. If these economies further increase their demand for precious metals including gold and silver, this could keep the prices of precious metals from plummeting.

Final note

Based on the above analysis, I think gold and silver might not rise much higher than their current level, but they also won't resume their downward trend from the previous months. The recent rise in uncertainty around the U.S economy hasn't seemed to pull up the demand for gold as GLD's and SLV's holdings aren't growing. Nonetheless, the decision of the Fed to keep its policy unchanged and further purchase long term bonds in the coming months could keep gold and silver from tumbling down. Finally, the potential rise in demand for precious metals in Asia could even slightly force prices of gold and silver higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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