The markets are closed in the U.S. today, but I promised my subscribers that I’ll send them an update today.
Therefore, I decided to share part of today’s Gold Trading Alert with you as well. What I do think deserves deeper analysis – and what I will focus on today – is the situation on the stock market and the link between it and the precious metals market.
The AI bubble could be bursting any day now as the hype appears to be passing and companies – especially big, old institutions – are encountering trouble implementing AI beyond the initial stages.
The improvements are real, but the implementation is not as straightforward, and long-term improvement in profitability is not as clear as many had hoped and put their money on.
Just like with the internet over 20 years ago – the technology was great, but the markets went WAY ahead of themselves and had to decline substantially.
The situation is not identical, of course, and in some ways it’s better than it was in 2000 (the AI companies are making some money), while in some ways it's worse, as more sectors are connected with AI, so the crisis could be worse when it finally happens. Plus, we have the cryptocurrencies now, which were the first to rally and are now likely the first to collapse. In fact, this is already taking place.
Of course, this is just a very brief fundamental discussion of what’s going on and why the decline in stocks is way overdue. Most importantly for now, we have technical reasons for the decline to happen shortly.
I previously focused on the S&P 500, and the bearish points that I made remain up-to-date.
The S&P 500 tried to break above 7,000 for months, and it failed each time. Last year, after a similar back-and-forth period (note the triangle-vertex-based patterns above), stocks finally declined in a meaningful way.
The good question here would be “if the back-and-forth trading continue for months, why can’t it continue for much longer”?
It can, but it’s not likely to because we might have just seen the final technical trigger.
Dow Jones Industrial Average just soared above the all-important record level of $50k.
And then it invalidated this breakout.
This is a powerful sell signal that makes the current situation very different from everything else that we’ve seen recently. Also, please remember that it comes on top of the decline in bitcoin which has already been underway for some time.
Moreover, just like what we saw in the S&P 500, we have an analogy in the Dow to what happened last year at this time of the year. Namely, stocks declined significantly, starting from a round number. This time it’s a move above $50k that didn’t hold; last year it was the move to $45k.
Here’s the key part – what does it all have to do with the precious metals market?
Quite a lot in gold’s case.
Much more in miners’ case.
And even more so in case of silver.
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 it is 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 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.
Thank you for reading today’s free analysis. I’ll continue to send you occasional updates and, as always, I’ll keep my subscribers informed at all times.
Thank you.
Przemyslaw K. Radomski, CFA
Founder
Golden Meadow®