Best of the Week
Most Popular
1.UK House Prices BrExit Crash NOT Likely Despite London Property Market Weakness - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit Implications for UK Stock Market, Sterling GBP, House Prices and UK Politics... - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - Nadeem_Walayat
7.UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - Nadeem_Walayat
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.The Stock Market is Reading it Wrong! - Chris_Vermeulen
10.Breakouts Galore in Gold and Silver - Jordan_Roy_Byrne
Free Silver
Last 7 days
The State Of The Economy - 28th July 16
Elliott Wave Crash Course - 3 Ways the Elliott Wave Principle Enhances Your Trading - 28th July 16
Japan's "Helicopter Money" Play: Road to Hyperinflation or Cure Debt Deflation? - 27th July 16
Monetary Zika - The Insidious Nature of Credit Expansion - 27th July 16
Gold and Pork Bellies - 27th July 16
Silver Is Insurance Against The Worst Part Of This Depression - 27th July 16
Don’t Buy The SPX Hope Stock Market Rally! - 27th July 16
Bitcoin $650 Still in Play - 26th July 16
Deutche Bank Stock Price Crash - The EU Has Problems Far Beyond the Brexit - 26th July 16
The Forex Markets Are Getting Exciting! - 26th July 16
Underpriced Silver Is the “Rip Van Winkle” Metal - 25th July 16
Declines in Multiple Market Indexes - 25th July 16
Retailers Are Doomed as Most Americans Are Too Poor to Shop - 25th July 16
Here’s One Currency That Could Go to Zero - 25th July 16
Stock Market Top is Expanding - 25th July 16
Silver Manipulation – Because They Needed the Eggs - 25th July 16
Silver Market COT Stuns: What's Going On Here? - 24th July 16
Gold Demand Remains Stable During Sector Weakness - 24th July 16
Sernova, Diabetes and Haemophilia - 24th July 16
Russia: Tensions, Turmoil, and Western Hubris - 24th July 16
Soybean Commodity Price to Soar Again - 23rd July 16
SPX Stock Market Uptrend Continues - 23rd July 16
Gold And Silver – Debt Addiction Will Carry Precious Metals Higher, Guaranteed - 23rd July 16
Pokemon Go - How to Play, First Use, Balls, Stops, Catching Pokemon's... Great Excercise! - 23rd July 16
7 Signs That the Gold Market Remains Resilient - 23rd July 16
Basic Income in The Time of Crisis - 23rd July 16
Silver Bull Faces Correction - 22nd July 16
The Serious Warning No One’s Talking About - 22nd July 16
Stock Market Insight from Greed, Volatility, and Put/Call Ratio - 22nd July 16
What Will Happen To the Stock Market When Interest Rates Rise? - 22nd July 16
How to Escape the World’s Biggest Ponzi Scheme - 22nd July 16
Addicted to Debt - We Can’t Borrow from the Future Anymore - 21st July 16
Not Everything Is Bullish for Gold - 21st July 16
Don’t Get Sucked Back Into the Stock Market - The Big Picture Hasn’t Changed - 21st July 16
Silver – Caught Inside - 21st July 16
Forex: "The Markets Are Getting Exciting!" - 20th July 16
China Economic Troubles - Is Kyle Bass Finally Getting His Revenge? - 20th July 16
Why Lithium Will See Another Price Spike This Fall - 20th July 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

The Inter-market Correlations May Prove Insightful for Gold and Silver Investors

Commodities / Gold and Silver 2012 Apr 14, 2012 - 07:34 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleTuesday marked the worst day of the year for U.S. markets. Stocks fell amid anxiety ahead of earnings season and rising bond yields for Spain and Italy, along with sharp losses for those markets.

The Dow Jones Industrial Average closed down 213.66 points, or 1.7%, resulting in a five-session losing streak. That’s the longest such run of losses since August. It was also the biggest one-day point and percentage drop for the index since Nov. 23. But Wednesday, U.S. stocks rose sharply after an extended losing run as Spanish and Italian bond yields fell.


How do these sometime seismic movements in the stock markets affect the precious metals markets? You might be familiar with our correlation analysis as this topic is discussed in our commentaries every once in a while, yet we decided to delve a bit more into that matter.

The relationship between gold and stocks is quite complex. It's positive, negative, and even neutral - all at the same time - depending on the perspective one takes.

If you look at yearly gold and Dow charts separately it seems at first glance that they are aligned. Both moved up since April 2011 and both markets experienced painful corrections. However, taking a closer look (by plotting their prices on the same chart, for example) shows that there were times when gold and Dow moved in opposite directions. For instance, gold rallied strongly from July 2011 to late August 2011 while at the same time stocks declined significantly. A few months later - during the first 3 weeks of October - the Dow soared without analogous action in gold. We've also seen a decline in gold in December 2011 and stocks actually were higher at the end of December 2011 than they were at month's beginning.

Also, in the past few days (second week of April) we saw gold moving higher along with lower stock prices.

If we take the entire previous year into account (the past 250 trading days), we see a moderately negative correlation between gold and S&P 500 (below -0.3), which means that these two asset classes moved on average in the opposite direction during this time frame.

In short, there are periods when gold moves along with stocks and there are periods when gold and stocks move in the opposite directions. It seems that the period in which gold moves along with stocks has ended. Gold declined along with stocks during the first week of April, however taking the previous 30 trading days into account, these two still moved, on average, in opposite directions. That's why on April 6th, 2012 we wrote that with negative coefficients (…) the suggestion is that declines in the general stock market will not necessarily be bearish for the precious metals sector.

Markets are not logical in the short term, but emotional. Fear and greed are the main drivers behind prices of virtually any liquid asset in the short term, including gold and stocks.

In the long run, however, gold moves independently from the stock market, driven by its supply and demand characteristics.

 Having said so much about correlations between precious metals and the general stock market, let us begin today’s essay with a quick look at our own tool, useful in spotting the interdependencies between the markets, named Correlation Matrix:

The Correlation Matrix is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. We have described the link between gold and stocks earlier in today’s essay, so here we will focus on the other important factor when it comes to correlations, namely the correlation between the precious metals and the USD Index.

We see moderately significant and negative coefficients for gold and somewhat weaker ones with silver and the mining stocks. The bearish outlook for the USD Index has bullish implications, as usual, for the precious metals.

Please note that the link between silver and the general stock market is moderately negative – similarly to the situation with the link between stocks and gold. Consequently, comments that we made about gold earlier today apply to silver as well

We have already discussed the quite complex correlation structure of gold and the general stock market. Let us now have a look at the S&P charts themselves, to see how the situation looks like on the market (charts courtesy by http://stockcharts.com.)

In the long-term S&P 500 Index chart, we have seen the expected pause following the index reaching the level of its 2008 high on April 2. The S&P has corrected but did not go all the way to the $1,320 level (red line seen on the chart below), more or less reaching the 2011 highs slightly below $1,360 and then bouncing. The breakout above these previous highs has been verified. Based on this chart alone, prices appear ready to move higher - the rally does no longer “demand” a correction as it has already happened.

In this slightly different view of the long-term S&P 500 Index chart, we can see a similarity between the trading patterns of mid-2010 and now. Back then, stocks reached a bottom in a similar way and then showed a sustained rally, had a small consolidation around the level of previous highs, and then continued their rally.

To finish off, let’s move on to the silver market itself.

Looking at this long-term chart (you can click the chart to enlarge it if you’re reading this essay at sunshineprofits.com)) we can see that silver is still moving between its important technical support and resistance lines. We continue to view the situation as bullish since the recent breakdown has not yet been truly confirmed. Silver continues to try to move above the resistance line. It stayed below this line for four weeks last December-January before the move back above it. This time it has been three weeks since it crossed to the downside and an attempt to move back above it fairly soon seems to be a good bet right now.

Silver is now in a post-correction period, so it has the strength to move above the previously impenetrable 50-week moving average (blue line on the above chart). The RSI is finally rising and this is a bullish indication. The most similar trading pattern in the recent past was seen in the 2008 bottom and subsequent rally. Back then a major bottom at was followed by a rally to the 50-week moving average price level, after which prices corrected and then the rally continued.

Summing up, the general stock market picture is mixed for the short term and bullish for the medium term. The implications are rather bullish overall for silver but should not be our primary focus at this time. The charts of the white metal itself seem to be better resources today. The situation in silver remains bullish.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife