Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in the METAVERSE Stocks Universe - 8th Dec 21
Stock Market Sentiment Speaks: I Expect 15-20% Returns For 2022 - 8th Dec 21
US Dollar Still Has the Green Light - 8th Dec 21
Stock Market Topping Process Roadmap - 8th Dec 21
The Lithium Breakthrough That Could Transform The Mining Industry - 8th Dec 21
VR and Gaming Becomes the Metaverse - 7th Dec 21
How to Read Your Smart Meter - Economy 7, Day and Night Rate Readings SMETS2 EDF - 7th Dec 21
For Profit or for Loss: 4 Tips for Selling ASX Shares - 7th Dec 21
INTEL Bargain Teck Stocks Trading at 15.5% Discount Sale - 7th Dec 21
US Bonds Yield Curve is not currently an inflationist’s friend - 7th Dec 21
Omicron COVID Variant-Possible Strong Stock Market INDU & TRAN Rally - 7th Dec 21
The New Tech That Could Take Tesla To $2 Trillion - 7th Dec 21
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Will the Stock Market and U.S. Dollar Situation Affect Gold?

Commodities / Gold and Silver 2012 Mar 31, 2012 - 01:57 AM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleThis Wednesday Goldman Sachs reiterated its position that investors should buy gold. Goldman Sachs remains bullish on the precious metal, citing the familiar fundamentals-- low interest rates and subdued economic growth as catalysts for gold prices to rise this year.

Goldman economists expect another round of quantitative easing from the Federal Reserve will weigh on the U.S. dollar and push gold higher. From Goldman:


Gold prices remain too low relative to the current level of real rates. Under our gold framework, US real interest rates are the primary driver of US$-denominated gold prices. However, after being remarkably strong in the first half of 2011, this relationship broke down last fall, with gold prices falling sharply in the face of declining US real rates, as tracked by 10-year TIPS yields. While gold prices have returned to trading with a strong inverse correlation to US real rates since late December, at sub-$1,700/toz they remain below the level implied by the current 10-year TIPS yields.

The gold market’s expectation that real rates would be rising along with economic growth may help explain this valuation gap. We believe that despite last fall’s decline in 10-year TIPS yields, the gold market may have been expecting that real rates would soon be rising along with better economic growth, leading to a sharp decline in net speculative length in gold futures. Accordingly, a simple benchmarking of real rates to US consensus growth expectations suggested a level of +40 bp by year end. Our models suggest this higher level of real rates would be consistent with the current trading range of gold prices. As we look forward, our US economists expect subdued growth and further easing by the Fed in 2012, which should push the market’s expectations of real rates back down near 0 bp and gold prices back to our 6-mo forecast of $1,840/toz.

The firm says that strengthening U.S. economic data would represent a growing risk for gold.

“We reiterate our view that at current price levels gold remains a compelling trade but not a long-term investment,” Goldman says.

In general, we disagree, as we believe that gold is a very good long-term investment. To see how the USD Index and the general stock market fit into this picture, let’s move to the technical part of today’s essay. We start with the USD Index chart (charts courtesy by stockcharts.com).

This week the index moved a bit lower, down 1.64 or 2% since last Thursday. It is no longer close to its 2011 high and prices are now visibly below the 80 level and more or less at the long-term resistance line. No breakout has been seen so far.

In the short-term USD Index chart, it appears that we may see another small rally in the days ahead. A cyclical turning point is at hand, and with declines having been seen for a couple of weeks now, a local bottom could form followed by a small period of moves to the upside. If it does occur, it will likely be short lived since the main, medium-term trend is now down.

Although the very short term may see some strength here, this does not necessarily translate to weakness in the precious metals sector. A rally in both gold prices and the USD Index would result in gold appreciating from a non-USD perspective. In fact, this is something which appears to be in the cards as well.

Let us move on to the general stock market now.

In the long-term S&P 500 Index chart, it seems that stocks may pause soon, as they’re about to reach their 2008 highs. Thursday’s closing index level was just 2-3% below this resistance line. If prices decline from here, they will likely not go lower than to the level of the 2011 highs. We would then expect the rally to continue in a manner similar to what was seen in late 2010.

In the short-term SPY ETF (proxy for S&P 500) chart, we see a bit of a different picture. Here, stocks are at a short-term support line, so it seems that the next short-term move will be to the upside. It’s likely however that this move will be somewhat short-lived based on the previously discussed situation on the long-term chart.

Can the above situation be bearish for the precious metals market? Let’s take a look at the correlation coefficients between stocks and gold, silver and mining stocks.

The Correlation Matrix is a tool, which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector.

Two weeks ago we wrote the following on the dependencies between precious metals, currencies and the stock market:

The general stock market simply does not appear too important for gold, silver and the gold and silver mining stocks. (…)
The strong negative correlations between the USD Index and the precious metals continue. The implications appear bullish for the medium term and somewhat unclear for the short term.
The situation changed slightly in the short-term correlations: Gold, Silver and Mining Stocks seem to be correlated moderately strongly with general stock market, whereas the short-term correlations between Silver and USD as well as Mining Stocks and USD seem to have weakened.

In general, the coefficients this week are not very strong with many of them in the range of -0.5. It seems much better to focus on the clearer technical situations in the gold and silver markets as opposed to what we now see in currency and stocks.

Summing up, The situations in the USD Index and the general stock market seem a bit unclear for the upcoming two week period. The USD Index may move a bit higher and a small move to the upside may be seen for stocks as well. Both moves appear to probably be short-lived, however, with stocks likely to soon correct and a subsequent move to the downside seemingly in the cards for the USD Index. This is not expected to have any serious bearish impact on gold, silver or the gold and silver mining stocks.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

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

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Przemyslaw Radomski Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in