The window is closing for a gold (and silver) trading rally.
Gold prices have failed to rally from deeply oversold conditions. Moreover, this does not simply reflect dollar movements. The advance/decline line for gold in various currencies also is falling.
Our Commodity strategists had been expecting countertrend rallies in gold and silver. Nevertheless, there are too many underlying negatives to offset the near-term boost from generous monetary conditions around the world. The equity risk premium is shrinking. The Fed is considering tapering bond purchases, likely in March or sooner. Inflation expectations are tame around the world. The “Iran tail risk premium” has fallen in the wake of a preliminary nuclear deal with the West.
[Must Read: Martin Armstrong: Expect Cashless Society, Not Hyperinflation]
Obviously, there are scenarios under which gold and silver will rally. For example, disinflation may be bad for gold, but deflation would be a game-changer. Outright deflation in the U.S. and other major countries would spur another burst of monetary experimentation and quash “taper talk”. Granted, there have been signs of weakness in U.S. mortgage applications and durable goods orders. However, we do not assign high odds to this scenario given the easing of fiscal restraint in the U.S. and Europe next year.
Bottom Line: Gold prices likely will “go nowhere” over the next few months, albeit with plenty of volatility as odds of Fed tapering shift.
