Will Gold And Silver Tumble Further?

Lior Cohen profile picture
Lior Cohen

The prices of gold and silver plummeted in the past week to their lowest levels since July 2013. Will the recent freefall of gold and silver continue? Let's examine the latest news that may affect gold and silver prices.

The ongoing decline in the prices of silver and gold has also reflected in the drop in demand for leading precious metals' ETFs such as SPDR Gold (GLD) and iShares Silver Trust (SLV). During November, the SPDR Gold's holdings fell by 2.3%; iShares Silver Trust's silver holdings inched down by approx. 0.1%. The progress of the U.S economy and the speculations around the Fed's future changes to its monetary policy may have driven down the demand for gold and silver as investments.

FOMC's policy and precious metals

The minutes of the last FOMC meeting back in October, which ended with no change to the Federal Reserve's policy, may have reignited the speculations around the FOMC's policy; specifically, the FOMC's decision to start tapering its asset purchase program. Some suspect the FOMC may announce this change to policy in the last meeting of the year on December 17-18. It was announced a few months back that the Fed will start scaling down the long-term securities purchase program (QE3), the question remained when it will commence. This decision may have contributed to the sharp fall in precious metals prices in recent months.

Besides tapering QE3, some suspect the Fed may also consider raising its cash rate in the near future. Such a decision is likely to further drag down the prices of gold and silver. But in the minutes of the last FOMC meeting, FOMC members stated the importance of conveying to the public that future decisions regarding tapering QE3 don't mean the FOMC will raise its interest rate. This rate is likely to remain at its current low level until economic conditions improve. These conditions include unemployment rate falling below 6-6.5%, while short-term and long-term inflation remain stable and low (below 2.5% annual rate).

In the last U.S non-farm payroll report, 204,000 jobs were added. The current unemployment rate is at 7.3% and hasn't changed much in the past four months. Based on the past several months' progress, the rate of unemployment may reach the 6.5% by the end of next year. This means, the U.S. economy is slowly recovering but still has a long way to go. Therefore, it's unlikely that the FOMC will decide to raise its cash rate in the near future. This could keep the prices of gold and silver from further tumbling down any lower.

Demand for precious metals in Asia

Despite the commencement of the wedding season in India in the past month, the demand for gold and silver fell, partly due to the rise in import taxes on gold. One report states that during October gold and silver imports fell to $1.3 billion. In comparison, during October 2012, imports reached $6.8 billion. Part of the drop in value is related to the decline in prices; the depreciation of the Indian rupee has also reduced the demand for gold and silver. Moreover, according the Gold Council quarterly report, India's demand for gold during the third quarter fell by 21% compared to same quarter in 2012.

Conversely, the demand for gold in China continues to grow: China's consumer demand reached 210 tons - an 18% gain compared to the parallel quarter in 2012. Some analysts guess the People's Bank of China might start to accumulate as much as 500 tons of gold each year in order to build its gold reserves. In any case, the ongoing strong demand for gold in China is likely to curb down the ongoing fall in prices of gold.

Final note

Based on the above, I think gold and silver aren't likely to recover from their tumble anytime soon. On the other hand, I also think the sharp drop in prices may reach a halt in the near future. If the FOMC announces the tapering of QE3 in December this could have some moderate adverse effect on gold and silver prices, but I suspect most of this effect is already factored into current prices. If the U.S economy continues to slowly recover, this could raise the speculations of raising the Fed's interest rate in the near future, which could drag further down precious metals' prices. But I guess the Fed won't make such a move anytime soon. Therefore, these speculations won't have a sustainable effect on gold and silver over time. Finally, the potential rise in demand for precious metals in China could slightly pressure up the prices of gold and silver.

For further reading see: Gold and Silver Outlook for November 25-29

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.

This article was written by

Lior Cohen profile picture
Hi I'm Lior, an economist with a PhD in economics from the University of Barcelona. I have been a blogger for over a decade focusing mostly on commodities (mainly oil and gold) but also stocks, bonds, and currencies. I have also been an active investor in recent years. My blog is liorcohen.net. I'm also a cohost of the podcast Market Movers marketmoverspodcast.comYou can also follow me on twitter  @LiorCohenEcon

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