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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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The general stock market is one of the key drivers behind the prices of precious metals, so it is always usefully to analyze it.


Source: StockCharts.com


The previous bearish situation in the main stock indices didn't change this week. We've seen the general stock market rally once again, but the upswing has once again failed to move above the previous highs, which is another bearish signal.

Moreover, this created a head-and-shoulders pattern, which means that once we move below $110 in the SPY ETF, the following decline is likely to stop no sooner than at $107.

The bearish implications of this chart are strengthened by the corresponding action in volume, which is higher during downswings than during upswings.

Additional conformation comes from the analysis of the financial sector.


Source: StockCharts.com


The situation on the Broker/Dealer Index creates a bearish divergence with the general stock market.

The financial sector used to lead the whole market, so the fact that each new top is lower than the previous one, signals that the whole market may plunge sooner rather than later.

This is a negative factor for the precious metals market because precious metals are still positively correlated with main stock indices.

However, this may change in the future, and such change may mark the end of the current correction in precious metals.

The other important market that influences the prices of gold, silver, and corresponding equities is the USD Index.

Summing up, although gold is a quite popular topic in the media these days, a vast majority of investors are still out of the market. They talk about it -- become increasingly more interested in the precious metals sector -- but they're not convinced enough to buy silver and gold. This is why there is still much room to go for this bull market, and for you to multiply profits that you have achieved so far.

From the short-term perspective, however, it seems that the correction isn't over yet, and that its second part has just begun. This outcome has been indicated by several markets, so its reliability is rather high.

Thank you for reading and have a great and profitable weekend!


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No positions in stocks mentioned.
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