This essay is based on the Premium Update posted on January 21st, 2011
With gold prices showing no signs of a breakout in 2011 so far, many investors have started unwinding long positions in anticipation of no further upside. The situation warrants a close scrutiny of the state of affairs. In the following part of this essay we analyze indications from the correlation matrix and technical indicators from silver and mining stocks to gauge the extent of this concern.
However, first, we would like to draw your attention to the fact that the London Bullion Market Association conducted its annual survey of leading analysts to ask them where the price for gold will go in 2011. A total of 24 contributors gave their estimates for the high, low and average price for 2011 for gold, silver, platinum and palladium. In 2011, Forecast contributors predict rises for all precious metals. Their average gold forecast is US$1,457, a 19.0% increase on the 2010 average price, similar to the forecast of $1,450 made by delegates at the 2010 LBMA Precious Metals Conference in Berlin last September. Analysts predict that the average silver price will be $29.88, a 48.0% rise on the 2010 average price. The average 2011 Platinum price is forecast to rise 12.6% from the average 2010 price, to $1,813 and palladium shows no sign of slowing down with an average 2011 price prediction of $814.65, a 54.8% increase on last year's bumper average price.
Generally, when everyone gets bullish it's time to sell, and when everyone is bearish it's time to buy, so perhaps the situation is not really as bullish as it might appear at the first sight.
Let's begin this week's analysis by taking a look at the recent readings from our correlation matrix.
The correlation matrix shows that the short-term coefficients are not as significant as in weeks past. There appears to be a slight negative correlation between metals and stocks but this does not hold true for silver.
It seems that the medium-term coefficients (90-day and 250-day columns) are of more value at this time. Recent breakdowns have been seen in many of the markets this week but in most cases have not yet been verified. The situation is such that if these breakdowns are verified in the days ahead, the impact will likely be felt for weeks and therefore the medium-term columns will provide valuable insight.
Only the general stock market appears to have a significant influence on the precious metals for this time-frame. Therefore, if stocks decline from here, the same will likely be seen across the precious metals sector for they will be dragged down as well by the declining stock prices. Although the relationship is not clearly seen on a day-to-day basis (short-term correlation is weak), a bigger move in stocks is still likely to have influence one the precious metals sector.
Consequently, the most important influence upon precious metals this week seems to be the general stock market and the outlook for stocks appears bearish. An additional indirect influence comes from the USD Index and the sentiment here is bearish as well.
Because of its multiple industrial uses, any serious weakness in the main stock indices is likely to affect silver more than gold (charts courtesy by http://stockcharts.com).
Still, for now, silver's long-term chart for silver shows price action similar to that seen for gold. There has been a breakdown below the long-term support level which has not yet been verified. This is a slightly bearish signal and, if verified and seen in other precious metals markets, will likely result in silver prices declining quickly as well. As we have often mentioned in past updates, silver is the least predictable of the precious metals and often follows the trends set by gold and mining stocks.
Today, it may also follow a quick decline in stocks, which we have yet to see.
Moving on to the mining stocks, the breakdown below 2008 highs is clearly visible on the XAU Index chart.
The XAU Index of gold and silver mining stocks saw a decline in excess of 10% since the beginning of the year. The previous increases have failed to hold the breakout above the 2008 highs, and at this moment the price is below this particular level. A move back to the 2008 highs will verify this recent breakdown. If this does indeed happen (mining stocks fail to move quickly above this level), further declines will be likely and perhaps a bet on lower mining stock prices would be in order.
If the big decline does come to pass, the XAU Index levels will likely move down close to 180 and nearly to the lower border of the rising trend channel.
Overall, if we see higher prices for mining stocks, which appears likely, and this increase is stopped by the level of the 2008 highs, this would be a strong indication that lower prices for the whole precious metals sector could soon be realized.
Summing up, given the size of the potential move in the precious metals market in either direction from here, one should focus on factors influencing precious metals in the medium term – and at this point it is the general stock market.
Meanwhile, we have just posted a special mid-week update with our next trade and explanation of a change concerning the long-term investment. In order to read it simply sign up today for our mailing list and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Gold & Silver Investors and Speculators. Mailing list is free and you may unsubscribe at any time.
Thank you for reading. Have a great and profitable week!
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