- The Fed is not going to stay on hold forever. Although we are many months away from removing accomodation, Fed officials have already started to discuss exit options. Moreover, Fed balance sheet expansion is probably over (at least for now, until and if we get a second economic leg down). Fedspeak might also become increasingly hawkish as the dollar falls and bubbles develop everywhere (see previous posts). So we may see a short term sell off if and when that happens.
- Inflation is not an immediate problem. Fiscal deficits by themselves don't cause inflation, money does. Inflation might become a problem eventually as the money supply has increased quite a lot last year, but since the rate of growth in the money supply has slowed of late, one could still imagine that the money supply will be reined in before inflation pressures develop. I personally don't think that will happen, but that possibility can at some point be priced in by the market, which will not be gold-friendly. Finally, I believe we will see slower than expected growth next year, which will put a damp on inflation expectations (at least for a little while longer).
- Gold is overbought. Just look at any chart: it's overbought by any measure on daily charts and weekly charts. Plus it has closed up almost every week in the past several months, which means it has become a one-sided bet.
Hulbert Sentiment Index