Gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) had a great start in 2014, as their prices rallied 15% from their December 2013 lows. However, with geopolitical risks subsiding and no signs of a pickup in the rate of inflation in the largest world economies, the short-term outlook for gold and silver remains bearish. Gold and silver might test the lows of their one-year price ranges soon, especially if deflationary fears surface in the next couple of months. Europe and the United States are struggling to boost growth and inflation has been stubbornly low with no signs of a pickup yet. The long-term outlook for gold and silver is much better than the short-term outlook, since I believe that the current monetary policies are bound to translate into higher inflation rates down the road.
A look at inflation levels in the United States, Japan, China and Europe
Inflation in the most of the developed world has been subdued in the last two years. The U.S. inflation rate is in the 1% to 2% range since the end of 2012. The situation in the eurozone is even worse, as the inflation is the lowest since the 2009-2010 period. The situation in Japan is getting better, but this might be a short-term event because of the pickup in consumer demand before the sales tax hike in April. We should find out soon if this was a one-time event, and what the impact of the sales tax hike was on Japan's inflation rate. China's inflation rate has been declining in the past several months. What is evident here is that while the monetary policies in the United States, Japan and Europe are accommodative to a large extent, but these policies are not having the desired effect on inflation. While I expect the long-term impact on inflation will be quite positive, the short-term deflation worries are more than enough to weigh on the prices of gold and silver. Deflationary pressure might prevail in the short-term and will probably give us a chance to buy precious metals at lower levels. The CPI levels of the world's largest economies will continue to be the main driver for gold and silver prices.
No safe-haven buying
Geopolitical turmoil at the beginning of the year had a positive impact on the prices of gold and silver. Although the Ukraine crisis seems far from over, it will likely remain a local conflict, and should not have an impact on the prices of precious metals. There are other geopolitical issues, like the China-Japan and China-Vietnam territorial disputes that might spark safe-haven buying, but I do not think that there is potential for serious escalation. The other part of safe-haven buying is the instability of equity markets. This has also been a non-issue so far, but may be in the intermediate-term, but this may be also linked to deflation worries which are not bullish for gold and silver, and they could both plummet together with the equity markets, as they did for the most part in the 2008-2009 period.
A look at the chart
Gold and silver are on their way to test their 12-month lows in the next couple of weeks. Silver is already there and may break to the downside any day, but I believe that the price of gold is the more important factor here. Gold is still 5% above its July and December 2013 lows, while silver is at the low of the range. It is also evident that the rallies following the lows have taken gold and silver prices to a lower level than before, which is also bearish for the precious metals, as it shows the buyers are not able to take the price higher.
I believe that the inflation and price charts paint a clear picture, and that until inflation in the world picks up significantly, there will be no meaningful rallies in precious metals. Eurozone is still the weakest link, and we have to wait and see if there are positive effects of the latest policy changes by the ECB. There is also uncertainty in Japan with regards to its sales tax hike. The United States' inflation rate seems on a verge of a breakout above 2%, but it has done this before and failed to cross the 2% mark in the past two years. I am bullish on gold and silver long term, but the short-term pressure is still evident and might take them lower in the next couple of months.
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