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Precious Metals' Correlation With the General Market


Precious metal stocks are following the general stock market more closely than they follow the USD Index.

In the previous essay, I commented on the recent developments in the price of gold. The technical part of this week's essay is dedicated to the situation in the precious metals stocks and the general stock market. The prices of these stocks are highly correlated with the underlying metals, which means that the following analysis is useful also to investors and speculators following the spot prices of gold and silver.

I summarized that the precious metals market has moved higher, and it appears that it will need to take a small breather relatively soon, and this is what we've seen so far this week. Still, the long-term picture didn't change much. Let's take a look on the chart below for details:


The analysis of the long-term HUI chart suggests that gold stocks may need to move a little higher before forming a temporary top. In the past, local tops have been formed after the HUI Index moved above the 50-day moving average, which hasn't been the case yet.

Given the strength of the current rally and the previous performance of precious metal stocks after the bottom, it seems that the coming correction is likely to be relatively small. Naturally, that is the case if the general stock market doesn't begin a massive plunge soon.

Speaking of the general stock market and its influence on the prices of precious metals, please take a look at the current version of the correlation matrix.


The above numbers don't look too encouraging for precious metals bulls given the situation on the general stock market. Previously I wrote:

An interesting fact is that the very-short-term (based on just 10 trading days) influence of the HUI Index is stronger for the general stock market than it is even for gold. In other words, during the last 10 trading days, gold stocks were more closely following main stock indices than there were following gold.

Not only is this tendency still present, but it's also much more visible in other parts of the precious metals market. The correlation coefficients for S&P and gold, silver, and juniors are currently very strong. This means that if we don't see signs of a disconnection between these markets in the coming weeks, it will become much more likely that the next medium-term (months) move will be down, not up.
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No positions in stocks mentioned.
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