Are Gold And Silver Making A Comeback?

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Includes: GLD, SLV
by: Lior Cohen

The prices of gold and silver tumbled down in the past couple of weeks to their lowest levels in years. Looking forward, will gold and silver bounce back? Let's analyze the upcoming events that may stir up the gold and silver markets and examine the latest developments in precious metals.

U.S. Economic Growth

This week, U.S non-farm payroll report will come out. This report could affect investors' expectations regarding the odds of the FOMC tapering its current $85 billion a month asset purchase program. In the past, QE1 and QE2 contributed to the rally of precious metals prices as they raised concerns of a potential spike in inflation in the U.S. But in the past several years, the rate of inflation remained stable and in recent months even below the Fed's target inflation of 2%.

If the U.S economy's growth will slow down and the number of jobs added will be below 150k, this could push back the Fed from tapering QE3 in the coming months and thus pressure back up gold and silver prices.

China's Demand for Gold Is Rising

Despite the drop in prices of gold, the consumption of gold in China, among the leading importers of gold worldwide, is expected to exceed 1,000 tons in 2013. In comparison, during 2012, China's gold consumption reached 832.18 tons. This means, China's gold consumption is expected to rise by more than 20% (year-over-year). The ongoing rise in demand for gold is likely to curb gold price from falling further.

India's Gold & Silver Imports

The Indian government is trying to ease down the demand for gold as earlier this year it raised the import tax on gold. Moreover, India's central bank has recently imposed additional restrictions on gold imports by excluding credit transactions for gold imports unless they were intended to export jewelry. Despite these restrictions, the recent dip in the price of gold led to a record high of gold imports in India during May. Even silver imports are rising: During the first five months of 2013 imports grew by more than 26% (year-over-year). The rise in gold and silver imports is likely to maintain precious metals prices from tumbling further down in the near future.

Europe

ECB will decide on its interest rate for July. Last month ECB left its interest rate unchanged at 0.5% - its lowest level ever. If the ECB will surprise and cut its rate again, this could pull down not only the Euro but also gold and silver prices.

Take Away

Based on the above, I suspect gold and silver might bounce back from their sharp fall in recent weeks. The ongoing rise in demand for physical gold and silver is likely to maintain precious metals prices from tumbling further down. On the other hand, the demand for gold and silver as investments is likely to further dwindle, which will hold back precious metals from making a comeback.

For further reading see: Gold and Silver Outlook for July

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.