Gold and Silver Outlook: Will the Fed Taper QE3?

The prices of gold and silver haven’t done much during last week as they moved in an unclear trend. Next week, however, the precious metal market might stir up as the FOMC will convene and decide to any changes to its monetary policy. Let’s analyze the upcoming events that may affect gold (GLD) and silver (SLV).

Will the FOMC taper QE3?

This question will be the main issue that could stir up precious metals market this week. The Fed’s attempts to revive the U.S economy seem to have had limited success so far. Since the beginning of the year, unemployment dropped by 0.3 percent points to reach 7.6% in May – more than a one percent point above the Fed’s goal of 6.5%. Inflation is set at 1.1%, which is well below the Federal Reserve’s target of 2%. The GDP rose by only 2.5% in the first quarter of 2013 – lower than what many had anticipated. This means, the Fed’s QE3, in which the Fed is purchasing each month $85 billion long term securities, is having a very limited positive effect on the economic growth of the U.S. If the Fed will taper QE3 this month, precious metals are likely to sharply drop.

On the other hand, the Fed is having little help from the government: The IMF recently criticized U.S policy makers for the budget cuts. The budget cuts may have also impeded the progress of the U.S economy. So will the Fed taper its asset purchase program?

Last month, the FOMC left it policy unchanged, and in his recent testimony in Congress, Bernanke didn’t offer any insight regarding when the Fed will start tapering QE3. Based on the above, I think it’s still too early for the Fed to start tapering QE3. Nonetheless, I also suspect the Fed will lower its asset purchase pace closer to the end of 2013.

India’s demand for gold

India’s government decided to raise import tax on gold for the second time this year. Earlier this month, the government raised the tax from 6% to 8%. This decision may curb the demand for gold in India. Moreover, the ongoing depreciation of the Indian rupee against the USD is raising the price of gold in rupees, which is also likely to lower the demand for precious metals. On the other hand, some analysts still think the demand for gold in India will remain strong despite the rise in prices.

Take Away

Based on the above, my guess is that gold and silver will fall this week especially if the Fed will announce of any changes to its monetary policy or revise its forecast of the U.S economy.  The developments in China and India could also pressure down gold and silver prices. Finally, if gold and silver prices will decline, gold producers’ stocks such as Barrick (ABX), Goldcorp (GG), and Newmont (NEM) are likely to trade down.

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