In our previous essay we have mentioned that it does not seem that the ultimate top for this gold rally is behind us. Consequently, this week we would like to provide more information on what may influence various segments of the precious metals market, and what you can do about it.
When speaking about any money-related topic it is always useful to back up one’s arguments with numbers, and influence is no exception here. While correlation alone does not imply causation (meaning that the fact that something is correlated with something else doesn’t automatically mean that one of them influences the other, but the analysis of correlation coefficients for the precious metals stocks market is still important, because we often know more about the shape of the relation from other sources. For instance, we know that gold mining companies’ profits (and thus their stock prices, and the HUI Index) depends on the price of gold, not the other way around.
Having said that, let’s take a look at our correlation matrix:
Two factors are worthy of notation in the correlation matrix this week. First, there has been a significant decline in the coefficient for Gold and USD. Previously, both were rallying and there was a relatively high positive correlation between them. In the past two weeks or so, this has changed. Whereas gold has continued its upward movement, the USD has declined slightly. At this point – since gold moved higher in the past weeks – this number further supports the strength of gold and the validity of its rally. The yellow metal has strong momentum and is likely to maintain its rally in spite of where stocks and currencies go.
The second observation we wish to make this week with respect to our correlation matrix is the positive relationship seen between the general stock market and silver / mining stocks. The 30-day coefficients are both above 0.7, which means that the correlation is strong.
Mining stocks and silver are currently driven, to a comparable extent, by the general stock market and gold. It follows that trouble for the general stock market can clearly spell trouble for the mining stocks. At the same time the value of the correlation coefficient between gold and stocks is lower – about 0.4, which suggests that any trouble on the general stock market are likely to hit gold in a much smaller way than it would be the case with silver and mining stocks.
Therefore, if the main stock indices would be likely to move much lower, then it could be a good idea to stay out of silver and mining stocks. In fact, we have been steering our Subscribers away from mining stocks and silver for some time now. Gold emerged as the clear choice a couple of weeks ago when considering risk and reward ratios and this is still the case today.
Since the situation on the general stock market is so important right now, let’s take a closer look on the long-term SPDR S&P 500 ETF (NYSE:SPY) chart (charts courtesy by http://stockcharts.com/.)
On this week’s long-term general stock market chart we see that the lower resistance line has been surpassed with an upward move. The shape of the current chart and the volume patterns as well seem to indicate that we could be seeing the formation of the familiar head-and-shoulders pattern. This is a crucial development if it comes to pass. This would be a strong, bearish indicator for the general stock market and for silver and mining stocks as well. We will continue to monitor this daily and advise our Subscribers accordingly as this becomes more clear in the days ahead.
Here is a brief synopsis of what we will be looking for. If the main stock indices move to levels seen early in 2010, in the range of 114-115 and then decline, this will confirm the formation of the pattern and declining volume along with higher prices will indeed spell trouble. The next confirmation would be to see the volume increase along with lower prices after they reach the 114-115 area.
The range of the future downturn can be estimated by the size of the head or top of the pattern, which also corresponds to the 50% retracement of the 2009-2010 rally – around the 94 level in the SPDR S&P 500 ETF (NYSE:SPY). So although at first glance some may be inclined towards bullish sentiment in reaction to recent moves, this is not really warranted at this point in time.
Taking into account the comments made previously – that the general stock market is very likely to rally in the third year of the Presidential Cycle we end up with the conclusion that the main stock indices may begin to decline in the next few weeks, and move lower throughout the summer only to move up again in the final part of the year.
On the short-term chart, we see a close approximation to the 61.8% Fibonacci retracement level as a resistance close to the January high, thus making this resistance level stronger. Although we may see slight increases in the coming days, it does not appear that this will be the likely case in the month ahead. Further confirmation of this can be seen on the next chart.
On the Broker-Dealer Index chart, note that the upward move today in the general stock market did not keep the financial sector from declining. Conversely, it moved to its previous support level, and decline afterwards thus further verifying it as a resistance. This is a bearish sign indicating that declines in the general stock market are quite likely from here, but not necessarily right away.
Summing up, the situation in the general stock market may look bullish at first glance. Taking a broad perspective into account and analyzing multiple factors, it appears that the formation of a head-and-shoulders pattern may be in progress. If the head-and-shoulders pattern does indeed complete, there may be an inclination to sell long-term investments in silver and mining stocks. This is not yet the case, nor is it advised at this time. However, this is a possible development over the next few weeks.
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We have put together some more details on the SPDR S&P 500 ETF (NYSE:SPY) as well as some gold ETF options such as the SPDR Gold ETF (NYSE:GLD) below for you to take a look at:
SPDR S&P 500 ETF (NYSE:SPY) Visit Our SPY Category: HERE
The SPDR® S&P 500® ETF is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500 Index (Ticker: SPTR). Our approach is designed to provide portfolios with low portfolio turnover, accurate tracking, and lower costs.
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Investors have turned to gold ETFs as a safe haven during the recent stock market turmoil. They offer a great way to protect you against risk in your portfolio during uncertain times. We have put together some other ETF options for your viewing below:
The investment SPDR Gold ETF (NYSE:GLD) seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
The investment ETF (NYSE:GDX) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts (ADRs) of companies involved in the gold mining industry. The fund is nondiversified.
The Funds ETF (NYSE:GDXJ) investment objective is to replicate as closely as possible, before fees and expenses, the price and yield performance of the Market Vectors Junior Gold Miners Index (the “Junior Gold Miners Index”). For a further description of the Junior Gold Miners Index, see “Junior Gold Miners Index.”
The objective of ETF (NYSE:SGOL) the newly listed shares is to reflect the performance of the price of Gold bullion, less the Trust’s operating expenses. The Trust is open ended and is designed for investors who want a cost-effective(1) and convenient(2) way to invest in Gold as well as diversify their Gold holdings.
The investment ETF (NYSE:UGL) will seek to replicate, net of expenses, twice the performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics twice the return of the index. It may employ leveraged investment techniques in seeking its investment objective.
The investment ETF (NYSE:DGL) seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index – Optimum Yield Gold Excess Return. The index is a rules-based index composed of futures contracts on gold and is intended to reflect the performance of gold.
The investment ETF (NYSE:DGP) seeks to replicate, net of expenses, twice the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The objective ETF (NYSE:IAU) of the trust is for the value of its shares to reflect, at any given time, the price of gold owned by the trust at that time, less the trust’s expenses and liabilities. The trust is not actively managed. It receives gold deposited with it in exchange for the creation of baskets of iShares, sells gold as necessary to cover the trust’s liabilities, and delivers gold in exchange for baskets of iShares surrendered to it for redemption. The trust is not an investment company registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act.
The investment ETF (NYSE: DZZ) seeks to replicate, net of expenses, twice the inverse of the daily performance of the Deutsche Bank Liquid Commodity index – Optimum Yield Gold Excess Return. The index is intended to reflect changes in the market value of certain gold futures contracts and is comprised of a single unfunded gold futures contract.
The investment ETF (NYSE: GLL) will seek to replicate, net of expenses, twice the inverse daily performance of gold bullion as measured by the U.S. Dollar p.m. fixing price for delivery in London. The fund normally invests assets in financial instruments with economic characteristics inverse to the index. It may employ leveraged investment techniques in seeking its investment objective.