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High
volatility seen in commodities market in the past week attributes toward
ongoing social and economical developments in the Middle East. There are
ominous reports of thousands of people killed in Tripoli as anti-government
protests reached the Libyan capital for the
first time. The Libyan government attacked protesters, and rebels claimed
control of the second-biggest city, Benghazi. Tens of thousands of Bahraini
protesters marched in the capital demanding democracy.
Commodity markets
react to the changed outlook for the region and the global economy. Higher
commodity prices will be seen along with greater risk aversion in the equity
and credit markets. The latest rumors on attacking oil pipelines induce
massive speculations in energy commodity markets. These, coupled with the
currency market uncertainties impact current
gold and silver market sentiment.
At this juncture of
commodities markets react to the social and economic disturbances heavily,
let’s have some talk on the relationship between general stock market
and precious metals. Backed by the strong historical correlation between
silver and stock market, forecasts in stock market would be a gauge to
measure the strength in silver moves. Let’s start this week’s
technical part with the analysis of the S&P 500 Index (charts courtesy by
http://stockcharts.com.)
 
On the above chart we
see some volatility; however it is important to note that the downturn has
not moved to levels below the mid-2008 highs. It seems at this point to be
nothing more than a form of verification of the breakout above these highs.
The RSI is not
severely overbought any longer. It’s still relatively high compared to
its historical average, but it’s definitely not above the 70 level.
This is one of the positive results of the recent slight decline and a few
more days of sideways price action could cause further reduction in the RSI.
This could be a gathering of strength for a subsequent rally.
Overall, the situation
in the general stock market still appears bullish even though some declines
have been seen last week. It is quite probable that we have simply seen a
slight correction – a verification of the breakout above the mid-2008
highs.
Amid the short-term
volatile stock market fluctuations, let’s have a look into inter- as
well as intra market correlation exhibited by precious metals in the
recent past.
The implications
continue to show stocks moving more or less in tune with silver. Note the
high correlation coefficients in the medium-term columns. The general stock
market is still above mid-2008 highs and this is bullish for silver and thus
also indirectly for the rest of the precious metals sector.
Mining stocks have
moved above their mid-2008 highs and are verifying this breakout. The same
situation also applies to the white metal. No other significant correlations
of the US dollar or stocks are seen here in the short run. Both gold and
silver have been highly negatively correlated with the dollar but only in the
10-day column. This is simply a situation to watch at this point, not to draw
significant conclusions based on that column.
Let’s leave
silver for a few seconds and have a look at the ratio between the price of
gold and corporate bonds. This will allow us to keep the proper perspective.
The recent breakout
has been verified and the rally continues. Notice that the Gold: Corporate
Bonds ratio moved sharply higher after reaching a local bottom a few weeks
ago. It now appears about ready to take out its previous highs and it seems
this is likely to happen soon. If so, a significant upswing throughout the
precious metals sector is likely to follow - just like it was the case in
2005/6 and 2007/8.
Although there is
always a possibility that such a trend could be invalidated, it seems more
likely that the ratio will continue to move upwards. For this reason, we
believe the medium-term outlook for gold, silver and mining stocks is bullish
at this time. So, now let’s take a look at the very long-term chart for
gold
On the above chart we
clearly see that the price of gold is once again moving close to the rising
resistance line (upper border of the very long-term trading channel). Several
months ago, the upper border of the rising trend channel was approached but
not broken.
In the October 1st,
2010 Premium Update, we wrote the following:
Before the lower, less
steep line is surpassed, it is likely that gold will first reach a local top
and then go through a quick consolidation. This will most likely result in a
greater strength and increase the odds of a further rally being sustained.
Since that time gold
moved considerably lower and bounced. This action is clearly visible from the
very long-term perspective, so the gold market appears ready to move above
the aforementioned resistance level. The higher light blue line will then
likely become the next resistance level. It seems that this is the most
probable outcome going forward and target level of $1,600 or higher would
then be valid.
Before summarizing,
let’s take a look at the recent developments in gold stocks.
In the HUI Index (HUI
index indicates a portfolio of 14 major un-hedged gold mining companies),
chart we see the index level is above both resistance levels marked with
black lines and the breakout is in the process of being verified. The
head-and-shoulders pattern which was under development last week has nearly
been invalidated. This would of course be a bullish development.
It is our opinion that
the breakout will likely be verified and it is therefore probable that the
head-and-shoulders pattern will not be completed.
Summing up, the
general stock market is verifying a breakout above previous highs and the
same situation is also seen for silver. We mentioned the possibility of small
consolidation periods in the precious metals markets our recent commentary,
so seeing this now leads to us to refrain from any serious bearish sentiment.
Conversely, the situation remains bullish.
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Thank you for reading.
Have a great and profitable week!
Przemyslaw
Radomski
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