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General Stock Market's Influence on the Price of Gold


There hasn't been a disconnect between the two, so we must remain cautious.

In How the USD Index Is Affecting Precious Metals, I mentioned that the situation in the USD Index appears bearish, but it hasn't been the main driver of the precious metal prices lately. It's been the general stock market that's driving gold and silver prices lately, which means that the situation is now less than perfectly bullish, especially in the short term.

Therefore, this week I'd like to let you know what we think about the main stock indices and how it may influence the gold market.

Let's begin with the long-term SPDRs ETF (SPY) chart, which we often use as a proxy for the general stock market that allows us to analyze volume.


In the latest Market Alert I wrote the following:

The general stock market appears to be topping here, or at least the risk of a temporary downturn is high. Given the high short-term correlation between the general stock market and precious metals this means that the risk of a move lower in the metals (and corresponding equities) is also high.

As you may see on the above chart, the SPY ETF (proxy for the general stock market, which allows us to analyze volume) has just moved to the strong long-term resistance level. This level is created by connecting important 2007, 2008, and 2010 tops, so it is in fact a multi-year resistance level. In order to break above such a strong resistance, stocks would need to show some kind of signals of strength. High -- and rising -- volume during the upswing would clearly provide a confirmation, but we haven't seen that recently.

Moreover, we've seen the volume decline along with higher prices. While prices certainly may move temporarily higher, based on the historical performance of this market (and other ones as well) it's not likely that the general stock market will move much above such a strong resistance level right away.


The analysis of the short-term chart confirms the abovementioned point. The SPY ETF isn't only right at the strong long-term resistance level, it has also just touched the short-term resistance area. The volume is relatively low also from the short-term perspective and it has been declining during the current upswing.
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