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What Happens to Precious Metals If Stocks Plunge?

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Gold and silver are still correcting.

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Moving on to the technical side of the market, which allows us to time tops and bottoms with decent reliability, this week I'll provide you with the analysis of gold and the general stock market.


Source: StockCharts.com


The first thing that comes to mind after looking at the above chart is that gold is still far from the 38.2% retracement level of the whole upswing. Taking a closer look reveals one more support level -- the $105 level in the Gold ETF (GLD).

This is the price that stopped the initial post-$1,000-breakout rally, and it currently corresponds also to the medium-term support line. This may stop the decline for awhile (and both indicators on the above chart, RSI and Stochastic, confirm this), but will it be able to form a major bottom there?

It depends to a large extent on the situation on other markets, but -- as mentioned in What's Next for Gold's Brutal Sell-Off? -- it currently doesn't appear to be the likely outcome.

The analysis of the short-term situation provides additional confirmations.


Source: StockCharts.com


The price levels that were mentioned in the above part of this update are almost perfectly corresponding to the Fibonacci retracement levels on the short-term chart. The first level retracement level (38.2%) was just achieved, and the two following ones (50%, 61.8%) more or less correspond to the abovementioned $105 and $100 level.

This means that reaching any of them may cause the price to reverse, but it doesn't seem that it will be the first level that stops the plunge. One of the reasons I'm skeptical about an immediate turnaround is the situation in volume. Please note that the volume was low on Wednesday, when the price of gold moved higher, and it was high yesterday, when gold declined.

This is not a positive signal, and it suggests that the decline isn't over yet. It's currently difficult to say if it will be $105 or $100 that would stop this plunge, but this should become more clear once we move closer to these levels.
No positions in stocks mentioned.
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