One of the keys to watch is to see if the US dollar as measured by the US Dollar index (USDX) is getting stronger or weaker. A stronger dollar tends to hold back inflation and keep commodity prices held down (at least in terms of their price in US dollars). Conversely, a weaker dollar suggests rising prices in commodities.
In January of this year, we noted that Ben Bernanke stated that he felt the US dollar rally was likely done for the time being (see this article in Bloomberg). We then noted that shortly thereafter the dollar started dropping. That trend as continued all year now as we can see in the USDX chart linked just below.
Readers can decide for themselves if Mr. Bernanke just made a lucky guess in January or not. Either way the dollar has absolutely headed down since his comments and the chart linked above shows very clearly that it has now reached a very key support level around 94. It has bounced up some off that support as we might expect. But if the 94 level does not hold, there is not much more support until the 80-82 level. That would be a very large drop pretty quickly if it does happen.
Whenever we look at currencies over time, it is always worthwhile to look and see how various major currencies have fared against gold. While they bounce up and down of course, over time gold does a lot better than many people realize. Here is a link to a chart of gold vs. the major currencies over the last 10 years.
I bet many people would be surprised to see how strongly gold outperformed them during this time (including the US dollar). This is even with gold having a major correction off its high reached several years ago.
Of course, it's no accident that gold and silver have started to show signs of life as the USDX has been falling this year. Watch the 94 level on the USDX over the next couple of weeks. If that holds and the dollar rallies well above 95, the uptrend for gold and silver will probably pause for awhile. If the USDX does not hold the 94 level, it is likely that we will see it pick up some speed downhill and provide more fuel to continue the gold and silver rally. That would also probably confirm that the years long downtrend for gold and silver bottomed out last December.
Added thought: When people talk about increasing the price of gold (or silver) to use it as a form of backing for the money supply that sounds strange to most people. Some may wonder if the government (or a central bank) can really just arbitrarily "set" the price of gold higher. The answer is yes they can. FDR did it once before in 1934 by increasing the price of gold 75%. He raised it from $20 to $35 an ounce.
Using a more modern example, the Royal Canadian Mint produces silver coins of various kinds. One version they produce is a silver coin a little over 1/2 ounce in size (15.87 grams). What's interesting about this coin is that they stamp a $50 face value on the coin and sell it out to the public for $50 per coin. Just by stamping a $50 face value on the coin they raised the price of silver in that coin to around $90 per ounce. Here is one around one ounce with a $100 face value stamped on it. These coins are legal tender. See, it's not really that hard. If you were making a one ounce gold coin, just stamp $5000 on it if you want to and sell it for $5000. Problem solved.
Update 4-28-16: The US dollar index is continuing to struggle to hold the 94 level actually closing below it today. If 93 does not hold, we can expect the decline to continue and pick up steam. Gold and silver are reacting to this as you would expect and showing increasing strength.