Tim, let's take your definitions and put them to a test. Let's apply them to a prophecy in scripture and see if they work. I'll use the Abrahamic Covenant as my example. In the Abrahamic covenant, God promised Abraham a land, a seed, and a blessing.
Let's look at the land promise first. The promise is made on several occasions but is given in detail in Gen 15:18-21. Historically and grammatically, physical land boundaries are described. In this case, taking the promise literally means taking it to mean physical land. So, literal interpretation is bound up in the historical and grammatical hermenuetic. If it does not mean literal, physical land, there is no way to know what it means.
What about the seed? The grammatical-historical meaning of the promise requires us to understand it as the birth of a physical son and physical descendants born to him. The covenant is kept on Abraham's part through a physical sign, that of circumcision. Here again, the meaning must be literal.
What about the blessing? The statement here is that "in thy seed shall all the nations of the earth be blessed..." (23:18). In the immediate grammatical-historical context, the specific meaning of this promise is not revealed to Abraham. One does not know from Genesis alone how this will be fulfilled. I think that you will agree that its ultimate fulfillment is in Christ who comes and blesses the world with the offer and means of salvation. And, those who put faith in Christ become spiritual descendants of Abraham as Paul teaches in Romans. This connects back to the promise of the seed but not in a way that Abraham would have understood.
You stated that in dispensationalism, "literal" always means "physical". No, literal means physical when the grammatical-historical meaning is physical as in the land and seed promises. In the blessing promise, the grammatical-historical meaning is spiritual and we accept it as such.
The weakness in your explanation, in my view, is this: Yes, Jesus used veiled language and parables to teach spiritual truth and to hide truth from unbelievers. But not everything Jesus said was veiled or in parables. When he announced that he was going to Jerusalem to suffer and die, that was not veiled language, it was plain. Yet, no one understood that until after it was fulfilled. What you are doing is taking plain language from the OT and pretending that it is veiled and spiritual. The land and seed promises are not veiled and spiritual, they are literal and must be understood as such. You say "we find that literalism is the predominant form of language used in narrative accounts. But is it the predominent form found in prophecy?" The fact is that literal language IS found in prophecy sometimes. When it is, it is misinterpretation to spiritualize it.