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Gold's Price Moves: For Clues to What's Next, Look to These Related Charts


Are lower prices for the whole precious metals sector in the market's future?

Therefore, from the European perspective, the situation looks quite bearish for the short term and it doesn't look too optimistic. However, if we want to have a more complete picture of the situation, we should examine another factor that is used to provide important signals for the precious metals market: the way gold stocks move relative to gold.

Let's start with the HUI-to-gold ratio, which is one of the more interesting ratios there are on the precious metals market. After all, gold stocks used to lead gold both higher and lower for years (which wasn't the case on a very short-term basis in the past few months).

On the above chart, we see that the ratio moved above the 50-day moving average in the middle of the June. However, the breakout didn't change the outlook. The gold-stocks-to-gold ratio still remains below the 2008 bottom. Despite the moves up we saw in July, the breakdown has not been invalidated and the downtrend still appears to be in play here. A downtrend in this ratio indicates that the gold stocks are underperforming gold, not outperforming it.

At this point, it's worth mentioning that in the gold-stocks-to-gold ratio chart, we didn't see a continuation of strength last week. Instead of further increases, we saw declines that resulted in a big drop in the HUI:gold ratio on Friday. In this way, the ratio moved below the 50-day moving average, which now serves as resistance.

Before we summarize, let's take a look at a chart of the ratio of the Market Vectors Gold Miners ETF (NYSEARCA:GDX) to the SPDR Gold Trust ETF (NYSEARCA:GLD).

In the medium-term miners-to-gold ratio chart, we initially saw a breakout above the declining resistance line. However, the RSI level was close to 70. When you take a closer look at the top of the chart, you will see that this level coincided with local peaks in the ratio this year, and the same was seen throughout the precious metals sector.

The following decline (we see it clearly on the above chart) is consistent with the previous observations. The fact that we did not see a huge drop in the recent days doesn't mean that we won't see one in the near future. We saw similar price action at the beginning of the June. After a slight decline, there was a major one.

In other words, the previous breakout (in June) was followed by a decline, so the current one is not as bullish as it might seem at first sight.

Summing up, the situation is quite bearish for the short term from the European perspective, and it doesn't look too optimistic -- especially when we take into account the combination of the psychological resistance level at 133 and the strong declining resistance line. The outlook for the mining stocks is also bearish and the trend is still down. The long-term breakdowns have not been invalidated and it seems that lower prices for the whole precious metals sector could follow soon.

Thank you for reading. Have a great and profitable week!

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

Twitter: @SunshineProfits
No positions in stocks mentioned.
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