Gold moved higher again, but not above its very recent high, silver
outperformed, and so did miners. Why?
Most likely because of the quick rally in stocks. In the Feb. 16 analysis, I discussed correlations between stocks and various parts of the
precious metals market in greater detail, but as a quick reminder
(quoting):
“I checked the short-term correlation numbers between
various parts of the precious metals market and stocks and they
are all positive, but the extent is different.
I focused on the short-term (5-day) correlations, as likely be a
short-term trigger and that’s what I wanted to detect
– which parts of the PM world are likely to react to it. It
was not my point to detect long-term drivers of each market
– the linear correlation coefficient is a tool that’s
too simple for that, anyway.
The correlation between gold and stocks (lower part of the chart)
is positive, but as you see it fluctuates quite wildly. The
current reading of 0.66 looks between being accidental and
somewhat significant.
In case of the GDXJ, the correlation is also 0.66, but it’s
been higher overall in the previous weeks – it didn’t
move below 0 this month, which was the case with gold’s
correlation with stocks.
In silver’s case, we see something profound. The
correlation coefficient’s value is 0.93 – a very high
level.
This tells us that while silver might (and very likely does) have a very bright (and shiny) future
ahead of it, it’s likely the case that stocks upcoming
– big – decline will be push it lower.
The same goes for mining stocks. The impact on gold is likely
to be smaller.
Remember how miners and silver declined in 2008 and 2020? We have
short-term proof that a decline in stocks is likely to have
similarly devastating effects.
One caveat, though. If silver’s physical market breaks
(multiple big players bid on physical silver as they can’t
get enough by taking delivery on the futures market), we could
have a situation, where physical silver trades much higher than
silver futures. That’s the main reason why I’m writing
about hedging the long-term silver investments (and the same about
the part in the insurance capital)”
The S&P 500 futures just jumped, which explains the same kind of
behavior in silver and mining stocks.
In silver’s case, the upcoming delivery notice might also be a
factor, but if his was really what was behind this week’s
upswing in the white precious metal, silver would be outperforming
here – to a considerable extent – while other markets
would be flat, declining or rallying but to a smaller degree.
This is not the case.
Miners moved higher.
Stocks moved higher.
Even bitcoin moved higher.
The latter is also a clue in and of itself. After a truly terrible
performance this year, the “new gold” is showing strength today without any improvement in its
fundamental situation.
This is simply excessive short-term optimism that’s driving
the markets today. In my opinion, it’s not about the precious
metals market specifically – it’s about (almost) everything.
This kind of rally is unlikely to last – the stock market
and other bitcoins have just as bearish outlooks as they had
before today’s rally. The impact on the precious metals
sector, therefore, is likely to be reversed.
Gold remains very close to its 61.8% Fibonacci retracement. The
technical link to the post-2011-top price pattern remains intact.
So do the fundamental observations discussed in the “Peak Confusion” analysis.
As discussed earlier – silver is up, but please note that
it’s not above its earlier February high… Which is
another thing making the current situation similar to the
post-2011-top performance. Back then, silver was not strong after
the initial slide, either.
On top of the above, we have the USD Index, which seems poised to
rally. My previous comments on it remain up-to-date. Quoting my Feb. 17 analysis:
“It’s a breakout. The USDX moved above the
short-term, declining resistance line, which is a bullish
sign.
This line, along with the rising support line based on the very
recent lows, create a vertex that is likely to mark some kind of turnaround. Either a local top or a quick decline to the previously broken
line that would – most likely – verify the
breakout.
This means that PMs and miners could decline in the very near
term and then move higher in a rather insignificant way – perhaps
another re-test of the February highs that would then be
followed by a decline to fresh short-term lows.”
In yesterday’s Gold Trading Alert, I added: Please note that the USD Index formed its local
bottom right at the vertex. This verified the breakout and made the
subsequent rallies more likely.
All in all, it seems that even though the fundamental case for silver remains exceptional, the case for a decline in the precious metals sector in the
following weeks and months remains strong.
Thank you for reading today’s free analysis. I’ll
continue to send you occasional updates and, as always, I’ll
keep my Gold Trading Alert subscribers informed (also on insurance-, investment-, and trading-capital-based details) at all times.
Thank you.
Przemyslaw K. Radomski, CFA
Founder
Golden Meadow®
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