Anyone who has followed closely the gold and silver markets cannot help but notice a change in sentiment in the two markets, as reflected in the charts of two major ETFs, SPDR Gold Shares (GLD) and iShares Silver Trust (SLV) - both funds are trading below their 200 and 100-day moving averages.
Is this momentum shift temporary, caused by an adjustment in asset allocation, or something more serious?
It all depends on the time frame of this question - as well as assumptions made about sovereign debt and the future state of the world economy.
In the short term, gold and silver are expected to continue their correction for four reasons:
First, the resolution of U.S. fiscal cliff has taken has taken a cloud of uncertainty away from Wall Street at least for the time being, a negative factor for Wall Street.
Second, the European sovereign debt risks seem to be evaporating for the time being, as the EU and the ECB seem to have things under control.
Third, an improving U.S. economy will make it less likely that the Fed will launch another round of Quantitative Easing (QE) - the primary fuel of the recent gold rallies. Besides, Fed's QE impact on the dollar and the metals has been increasingly neutralized by ECB's QE.
Fourth, anxiety over Abe's promise to print yen until it creates 2 percent inflation in the land of the rising sun - so far Abe's victory has been positive for the dollar and negative for gold.
Fifth, strong U.S. GDP and employment data have diminished the expectations for another round of QE, a negative prospect for the precious metals, as have been better data on the Chinese economy.
In the long term, things are unclear. The direction of metal prices depends on the direction of the world economy. A strong rebound in the world economy would be bullish for the metals, especially if it is accompanied by inflation - though such a scenario is very unlikely, as the eurozone and the U.S. will continue to deleverage.
A weak rebound, or even a prolonged (Japanese-style) stagnation - a very likely scenario - would be bearish for the metals.
Bottom line: The best days may be behind for the precious metals, at least until the next crisis, provided that central bankers still have enough ammunition to fuel another rally - this time around driven by inflation. Until then, conservative investors may want to stay away from gold and silver, while aggressive investors may want to short the two metals with options.