Gold moved higher again, but not above its very recent high, silver outperformed, and so did miners. Why?
Most likely because of the quick rally in stocks. In the Feb. 16 analysis, I discussed correlations between stocks and various parts of the precious metals market in greater detail, but as a quick reminder (quoting):
“I checked the short-term correlation numbers between various parts of the precious metals market and stocks and they are all positive, but the extent is different.
I focused on the short-term (5-day) correlations, as likely be a short-term trigger and that’s what I wanted to detect – which parts of the PM world are likely to react to it. It was not my point to detect long-term drivers of each market – the linear correlation coefficient is a tool that’s too simple for that, anyway.
The correlation between gold and stocks (lower part of the chart) is positive, but as you see it fluctuates quite wildly. The current reading of 0.66 looks between being accidental and somewhat significant.
In case of the GDXJ, the correlation is also 0.66, but it’s been higher overall in the previous weeks – it didn’t move below 0 this month, which was the case with gold’s correlation with stocks.
In silver’s case, we see something profound. The correlation coefficient’s value is 0.93 – a very high level.
This tells us that while silver might (and very likely does) have a very bright (and shiny) future ahead of it, it’s likely the case that stocks upcoming – big – decline will be push it lower.
The same goes for mining stocks. The impact on gold is likely to be smaller.
Remember how miners and silver declined in 2008 and 2020? We have short-term proof that a decline in stocks is likely to have similarly devastating effects.
One caveat, though. If silver’s physical market breaks (multiple big players bid on physical silver as they can’t get enough by taking delivery on the futures market), we could have a situation, where physical silver trades much higher than silver futures. That’s the main reason why I’m writing about hedging the long-term silver investments (and the same about the part in the insurance capital)”
The S&P 500 futures just jumped, which explains the same kind of behavior in silver and mining stocks.
In silver’s case, the upcoming delivery notice might also be a factor, but if his was really what was behind this week’s upswing in the white precious metal, silver would be outperforming here – to a considerable extent – while other markets would be flat, declining or rallying but to a smaller degree.
This is not the case.
Miners moved higher.
Stocks moved higher.
Even bitcoin moved higher.
The latter is also a clue in and of itself. After a truly terrible performance this year, the “new gold” is showing strength today without any improvement in its fundamental situation.
This is simply excessive short-term optimism that’s driving the markets today. In my opinion, it’s not about the precious metals market specifically – it’s about (almost) everything.
This kind of rally is unlikely to last – the stock market and other bitcoins have just as bearish outlooks as they had before today’s rally. The impact on the precious metals sector, therefore, is likely to be reversed.
Gold remains very close to its 61.8% Fibonacci retracement. The technical link to the post-2011-top price pattern remains intact.
So do the fundamental observations discussed in the “Peak Confusion” analysis.
As discussed earlier – silver is up, but please note that it’s not above its earlier February high… Which is another thing making the current situation similar to the post-2011-top performance. Back then, silver was not strong after the initial slide, either.
On top of the above, we have the USD Index, which seems poised to rally. My previous comments on it remain up-to-date. Quoting my Feb. 17 analysis:
“It’s a breakout. The USDX moved above the short-term, declining resistance line, which is a bullish sign.
This line, along with the rising support line based on the very recent lows, create a vertex that is likely to mark some kind of turnaround. Either a local top or a quick decline to the previously broken line that would – most likely – verify the breakout.
This means that PMs and miners could decline in the very near term and then move higher in a rather insignificant way – perhaps another re-test of the February highs that would then be followed by a decline to fresh short-term lows.”
In yesterday’s Gold Trading Alert, I added: Please note that the USD Index formed its local bottom right at the vertex. This verified the breakout and made the subsequent rallies more likely.
All in all, it seems that even though the fundamental case for silver remains exceptional, the case for a decline in the precious metals sector in the following weeks and months remains strong.
Thank you for reading today’s free analysis. I’ll continue to send you occasional updates and, as always, I’ll keep my Gold Trading Alert subscribers informed (also on insurance-, investment-, and trading-capital-based details) at all times.
Thank you.
Przemyslaw K. Radomski, CFA
Founder
Golden Meadow®