Gold And Silver Should Continue To Rally On Positive Catalysts

by: Lior Cohen

The prices of gold and silver bounced back during last month after they had tumbled down in the preceding months. Looking forward, will gold and silver continue to rally? Let's examine the upcoming news and developments that may affect gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) markets and project the potential outcomes for precious metals.

U.S. economy and the FOMC's next move

The main issue in the U.S. that could influence bullion traders is the next move of the FOMC: Some analysts suspect the FOMC might announce the tapering of its asset purchase program in the September FOMC meeting. The recent reports regarding the U.S. economy including the non-farm payroll report and growth rate of the GDP for the second quarter didn't meet the expectations of many analysts and could suggest the U.S. economic progress is slowing down, which may lower the odds of the FOMC cutting down QE3 anytime soon.

The minutes of the last FOMC meeting will come out on August 21st and might offer some insight behind the FOMC's next step.

I don't think the Fed will start tapering QE3 in the coming months as the U.S. economy isn't out of the woods just yet; the Fed is likely to keep requiring the asset purchase program in the near future. Since the inflation in the U.S. is still below 2%, the concern that QE3 will raise the inflation pressures isn't founded. Therefore, if the Fed will continue its asset purchase program, this could contribute to the rally of gold and silver prices in the coming weeks.

India's silver imports are rising

The decision of Indian policymakers to raise the import tax on gold has slowed down the rise in gold imports in recent months: During June, gold imports tumbled down by 81% to 31.5 tons. The current expectations are that gold imports fell during July as well. Nonetheless, the currently low gold price along with the appreciation of the Indian Rupee could pull up the demand for gold in the coming months.

Conversely, the import tax didn't include silver imports, therefore in recent months the demand for silver has sharply risen. In the first five months of 2013, silver imports reached 2,400 tons. In comparison, during 2012 (entire year), silver imports reached 1,900 tons. This staggering rise is plausibly also related to the tumble in silver price and the appreciation of the Indian Rupee against the US dollar that has also lowered the local price of silver.

If the physical demand for silver will continue to rise in the coming months, this trend may positively affect the price of silver.

China's Gold demand remains robust

Based on the World Gold Council, China is leading the way in the physical demand for gold: During the first quarter of 2013, China's total physical demand accounted for 33% of the total global demand. India was second in line with 28%. Therefore, the developments in China could affect the gold market. China's recent economic slowdown could curb the growth in the demand for gold in the near future. Nevertheless, China is still expected to pass the 1,000 tons this year, which represent a 20% gain compared to 2012. The recent drop in gold price is likely to keep the demand for gold robust.

Take Away

Based on the above, I think gold and silver might resume their upward trend in the near future. The strong demand for physical gold and silver is likely to maintain precious metals' prices from collapsing further. Finally, if the FOMC will maintain its policy unchanged, it is likely to keep gold and silver from resuming their downward trend.

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.

About this article:

Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .