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business newsHow the Stock Market Is Influencing the Precious Metals Market
By
Przemyslaw Radomski
Jul 27, 2010 3:20 pm
There appear to be bearish indications for gold, silver, and mining stocks in the next several weeks.
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In this article, I’m going to cover the situation on the general stock market, but the emphasis will be on the influence this might have on the precious metals market.
Let's use the SPY ETF as a proxy for the general stock market (courtesy of http://stockcharts.com).
While the bias for the main stock indices is now more bullish than was the case when my firm created the above chart, I’d still like to bring your attention to the relative performance of gold, silver, and mining stocks.
Even though stocks moved higher in the previous days, the reaction of precious metals has been quite weak. Whereas the general stock market has moved nearly all the way back to its pre-decline levels (second week of July), gold, silver, and mining stocks haven’t followed suit. This is, indeed, a bearish indicator for precious metals investors and traders alike. As of 3 p.m. EST, Goldcorp (GG) was down 4.2% over the past five sessions, Barrick (ABX) down 5.4% over the same period, Kinross (KGC) off .97%, Newmont Mining (NEM) lower by 6.2% and AngloGold Ashanti (AU) down 3.7%.
While I’ve covered the readings from my firm’s correlation matrix in a previous essay, I’d like to offer it once again, as it provides us with a useful illustration.
The correlation matrix is a tool that my firm uses to quantify observations we make -- at times it provides insight not visible directly on the charts or analyzes the fundamental situation of the precious metals market. When two markets or indices move in a similar fashion, the correlation coefficient in the matrix table above will be high -- that is, above 0.50.
Precious metals and the general stock market have some positive correlation but the levels are quite low. It appears that in recent weeks, the general stock market has been leading the precious-metals sector to some extent, and the correlation values wouldn’t reflect that (they don't take into account the fact that one market may lead or lag another one).
Summing up, there are bearish indications for gold, silver, and mining stocks in the next several weeks (we’re likely to see a short-term bounce to the upside though -- perhaps very soon) due to the recent recovery and rallyseen in the Euro Index, and the fact that it’s been rallying rather poorly given recent upswing on the general stock market.
I’d also like to share our thoughts regarding two additional issues. My firm received several questions last week, and here are our replies to two of them.
The first question is about copper:
At times we can see copper leading the main stock indices, which would be bullish here as copper (and copper mining stocks) appears to have broken out of the downtrend. However, on the other hand, we’ve seen the “death cross,” meaning that the 50-day moving average moved below the 200-day moving average -- commonly referred to as a bearish signal. The previous time we saw it take place was at the very end of 2007, just before the massive plunge materialized. Still, at this time, the bias is slightly bullish.
Another question we received was about the flag formation (price trading sideways but generally moving slightly in the counter-trend direction): Is it bearish or bullish for a given market?
The answer is that the flag formation is often a sign of continuation of a previous move. In other words, if the price was moving lower before entering the flag formation, the formation is bearish, and if the price was moving higher before entering the flag formation, the formation is bullish.
For the full version of this essay and more, visit Sunshine Profits' website.
Let's use the SPY ETF as a proxy for the general stock market (courtesy of http://stockcharts.com).
While the bias for the main stock indices is now more bullish than was the case when my firm created the above chart, I’d still like to bring your attention to the relative performance of gold, silver, and mining stocks.
Even though stocks moved higher in the previous days, the reaction of precious metals has been quite weak. Whereas the general stock market has moved nearly all the way back to its pre-decline levels (second week of July), gold, silver, and mining stocks haven’t followed suit. This is, indeed, a bearish indicator for precious metals investors and traders alike. As of 3 p.m. EST, Goldcorp (GG) was down 4.2% over the past five sessions, Barrick (ABX) down 5.4% over the same period, Kinross (KGC) off .97%, Newmont Mining (NEM) lower by 6.2% and AngloGold Ashanti (AU) down 3.7%.
While I’ve covered the readings from my firm’s correlation matrix in a previous essay, I’d like to offer it once again, as it provides us with a useful illustration.
The correlation matrix is a tool that my firm uses to quantify observations we make -- at times it provides insight not visible directly on the charts or analyzes the fundamental situation of the precious metals market. When two markets or indices move in a similar fashion, the correlation coefficient in the matrix table above will be high -- that is, above 0.50.
Precious metals and the general stock market have some positive correlation but the levels are quite low. It appears that in recent weeks, the general stock market has been leading the precious-metals sector to some extent, and the correlation values wouldn’t reflect that (they don't take into account the fact that one market may lead or lag another one).
Summing up, there are bearish indications for gold, silver, and mining stocks in the next several weeks (we’re likely to see a short-term bounce to the upside though -- perhaps very soon) due to the recent recovery and rallyseen in the Euro Index, and the fact that it’s been rallying rather poorly given recent upswing on the general stock market.
I’d also like to share our thoughts regarding two additional issues. My firm received several questions last week, and here are our replies to two of them.
The first question is about copper:
Would copper, as a purely industrial metal, be a relevant proxy measure for the industrial forces acting on silver? These would obviously be visible through a suitable spot price or ETF etc.Generally yes, but what we’d be looking for in copper is the "general stock market influence" in order to apply that to the analysis of silver market. It would be imperative to do so if we didn't have any other measures available. However, since we can analyze the main stock indices or even check volume trends through ETFs, we’re not missing much information by analyzing them directly. We agree that the analysis of the copper market might be more useful if we determined that it’s the general stock market that’s the main force behind silver's moves -- which is not the case at this point.
At times we can see copper leading the main stock indices, which would be bullish here as copper (and copper mining stocks) appears to have broken out of the downtrend. However, on the other hand, we’ve seen the “death cross,” meaning that the 50-day moving average moved below the 200-day moving average -- commonly referred to as a bearish signal. The previous time we saw it take place was at the very end of 2007, just before the massive plunge materialized. Still, at this time, the bias is slightly bullish.
Another question we received was about the flag formation (price trading sideways but generally moving slightly in the counter-trend direction): Is it bearish or bullish for a given market?
The answer is that the flag formation is often a sign of continuation of a previous move. In other words, if the price was moving lower before entering the flag formation, the formation is bearish, and if the price was moving higher before entering the flag formation, the formation is bullish.
For the full version of this essay and more, visit Sunshine Profits' website.
No positions in stocks mentioned.
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