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What the Bullish Picture for US Dollar, Stocks Means for Gold and Silver


Stocks look bullish for the medium term, and although a short-term correction is likely not too far off, don't expect to see it immediately.

To see how the situation in the USD and stocks may translate into the prices of gold and silver, we now turn to the intermarket correlations.

The Correlation Matrix is a tool my firm developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector, (namely: gold correlations and silver correlations).

The short-term situation here is mixed and no real implications can be drawn at this time. The medium-term correlations are negative for the precious metals with both the USD Index and the general stock market. The precious metals are still pretty much anti-asset at this time. The medium-term odds, which favor a rally in the USD Index and the general stock market, have now painted a bearish picture for gold, silver and the precious metals mining stocks.

To finish off, let us have a look at the situation in gold stocks relative to the yellow metal itself.

On the above chart, the situation hasn't changed much this week. Hence, comments made in last week's essay remain up-to-date at this time and the bearish outlook continues to be supported by this chart:
The trading channel and the next horizontal support intersect at a point much lower than where this ratio is today. Of course, the existence of a target level by itself is no indication that it will be reached; the trend has to be in place as well. The point here is that the ratio has already broken below the previous late 2008 major low and is now a bit more than 5% beneath it. This is a major breakdown and it was confirmed. The implication is that the trend is still down.

With the trend being down and accelerating and the recent breakdown being confirmed, there is a good possibility that the miners will decline significantly once again. This makes the previously mentioned target level a very important one. At this time it seems likely that the ratio will move to its 2000 low – close to the 0.135 level.

If gold stocks decline relative to gold as they did late in 2000, and gold declines to $1,300 or slightly higher, the target level for the HUI Index would be slightly above the low of 2008 – around the 180 level.

Summing up, the long-term and medium-term outlook is bullish for the USD Index at this time. As for stocks, the situation remains bullish for the medium term, and although a short-term correction is likely not too far off, we don't expect to see it immediately. Finally, gold stocks' performance relative to gold continues to provide us with bearish indications. Overall, it seems that the final bottom in the precious metals market is not yet in.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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