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What's Next for Gold and Silver

Stocks in this article: GLD SLV

NEW YORK (TheStreet) -- The prices of gold and silver haven't performed well during the past several weeks. Their recovery earlier this week didn't put much of a dent in gold and silver's big losses of recent weeks.

What is next for gold and silver? Let's analyze the latest news that may affect the metals.

The fall in silver and gold prices are reflected in the decline in demand for leading precious metals ETFs, including SPDR Gold (GLD) and iShares Silver Trust (SLV). During December, the SPDR Gold's holdings fell by 0.9%; iShares Silver Trust's silver holdings, by 0.5%. The upcoming FOMC meeting could influence gold and silver investors.

FOMC's December Meeting 

The FOMC will convene for the last time this year on Dec. 17-18. This will also be the last meeting with Ben Bernanke completing his term as chairman of the Federal Reserve.

Will the FOMC announce the tapering of its current $85 billion-a-month long-term asset purchase program in this meeting? If such an announcement were to be made, it could further drag down the prices of gold and silver. Moreover, this might rekindle the speculations that the Fed may raise its interest rate from its currently low rate, which was set back at the end of 2008.

Keep in mind, the Federal Reserve announced in late 2012 it would keep its interest rate low until mid-2015. Back in June 2013, however, the Fed stated it will maintain the interest rate low as long as:

"...the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored."

The recent non-farm payroll report showed a sharp drop in the rate of unemployment to its lowest level since the end of 2008. Currently the rate is at 7%; over 200 thousand jobs were added during November. Such big strides might bring the Federal Reserve to consider raising the interest rate for the first time in recent years much sooner than mid-2015. This could happen within the next several months. Such an event is likely to adversely affect the prices of gold and silver.

Besides the demand for gold as an investment, its demand in Asia is also likely to play a secondary role in the progress of gold price. 

Demand for Gold in Asia

During the wedding season in India, which started several weeks ago, the demand for gold tends to rise. But the imposed higher import tax on gold has reduced the demand for gold in India. But some reports suggest the unofficial gold imports are higher on account of illegal imports. In total, the demand for gold in the fourth quarter is likely to be lower than in the same quarter in 2012. During the third quarter, the demand for gold in India fell by 32%. But the demand for gold is still up for the year (first three quarters) compared to 2012. 

In China, however, the gold market is heating up: The total demand for gold in Great China (including Hong Kong) rose by (a year-over-year) 19% during the third quarter of 2013.

The strong demand for gold in China has offset the drop in India so that the global demand for gold rose during the third quarter by 6%. If China continues to augment its demand for gold, it could curb down the drop in gold price.

Latest Developments

According to the latest developments, I think gold and silver are likely to resume their downward trend in the coming weeks. My guess is that the FOMC won't change its policy in the upcoming meeting. The U.S. economy is showing progress, but it might be more prudent to taper QE3 in the next couple of months.

If the FOMC doesn't announce the tapering of QE3 in December, this could curb down the recent fall of gold and silver prices. Finally, if the U.S. economy continues to rally, this could raise the speculations that the Fed may consider raising its interest rate in the coming months.

Also see: Gold and Silver Outlook for December

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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