Advocating a rally in gold and silver prices

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Financial markets across the globe concluded the first trading week of the year deeply in the red zone. The volatility that took place will prompt investors to reposition their assets into safe-haven territory rather sooner than later.

The current gold and silver prices now look more attractive to investors. Silver, in particular is expected to be the winner in 2016.

Last Friday, both gold and silver closed higher. February comex gold futures managed to rally to a two-month high earlier in the week and are on track to close more than 3% higher. Meanwhile, although March silver futures are back down Friday, they managed to hit a two-week high of $14.385 an ounce and are almost 1% higher on the week. Gold was last quoted down $9.70 at 1098.10 an ounce and silver was last down 42 cents at 13.920 an ounce.

Investors and traders tend to remain most optimistic on silver for 2016 and even expect the metal to slightly outperform gold. Analysts are calling for a year-end price of $16.50/oz for silver, more than 17% higher from current levels.

A few fundamental reasons should be taken into consideration when advocating similar forecasts.

One of China’s primary tactics by which to navigate its current perilous financial straights is to devaluate its yuan, or renminbi, currency. The devaluation, among other things, allows China to boost its struggling economy. A weaker yuan increases the competitiveness of Chinese exports and reduces the Chinese propensity to import.

On the other hand, while China is dumping dollars and other parts of its foreign-exchange reserves, it nevertheless continues to add steadily to its gold holdings. Only in 2015, over 100 tons have been bought. As of December, the People’s Bank of China (PBOC) bought 19 more metric tons of gold, lifting its officially reported holdings to 1,762.323 tonnes. It added more than 100 metric tons in the second half of 2015, or about a 6% increase since it began updating its reserves via public announcements early in 2015. Still, its current bullion hoard represents only about 1.8% of its total foreign-exchange reserves. More purchases by the world’s sixth-largest official-sector gold holder could lend support to international prices of the precious metal. Higher gold prices will not necessarily curb PBOC’s buying, but a sharp drop could prompt it to purchase more.

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