Why Should Gold & Silver
Correlations Be Constantly Monitored?
By Przemyslaw Radomski, CFA
Correlation is a useful measure – it
helps us make predictions about a variety of events. But it’s also a bit tricky
– while there are relationships that seem stable (such as the fact that rich
people tend to spend more on luxury goods than the less wealthy), there are some
that do experience some volatility. These require special caution, as relying
blindly on what was seen in the past without checking whether it is still true
can lead to disaster.
Unfortunately, precious metals markets fall into the latter category, hence the
relationships between particular assets need constant monitoring in order to be
useful and – which is even more important – not to be harmful to the investors.
We have already written about the
correlations between gold, silver and U.S. dollar turned upside down, and it
seems that a lot of what was written then is still in place, however, due to the
fact that markets change every day, it is a good idea to see if there are any
indications that the situation will soon return to normalcy.
To do so,
let us move on to the technical part of today’s essay – we’ll start with the
analysis of euro’s long-term chart (charts courtesy by
We saw a
sharp rally last week as the declines of late 2012 were erased and the index is
back to levels not seen since December. With the correction behind us, it now
seems that higher values are likely as a short-term uptrend is in place.
recent declines stopped at two Fibonacci retracement levels. The first was the
38.2% level based on weekly closing prices and the second the 50% level based on
intra-day lows. The Fibonacci retracement levels once again have shown their
value as a useful technical tool.
on to the U.S. currency and see whether the rally in euro has had any influence
on the USD.
We begin the
analysis of the USD Index with the long-term chart since it gives us a bigger
perspective. With the situation bullish for the euro, it seems that a bearish
outlook here would be no surprise. This is very much the case as the index
closed below the resistance line yesterday. No breakout has been seen and a
recent attempt to move above this line was invalidated. The outlook here is
clearly bearish at this time; the resistance line appears strong enough to hold
a possible short-term rally in check.
have a look at the USD Index short-term chart.
we have similar implications to what was seen from the long-term perspective.
The index dropped significantly on Thursday after an unsuccessful attempt to
break out above the declining resistance line based on tops seen last year
in July and November. The invalidation is a bearish factor and likely a major
contributor to Thursday’s decline. The index closed even lower on Friday after
having tried to move much higher that day which is a bearish indication. It
seems that additional moves to the downside are ahead along with
additional rally in the Euro Index.
encouraging development last week was that the precious metals rallied when the
USD Index declined, seemingly a step towards return to normalcy, that is,
negative correlations between the dollar and the metals. We would like to see
more of this, however, before stating that this bullish development is once
again in place.
us have a look at the intermarket correlations to see how what we saw last week
translates into the numbers, and whether we can expect any improvements in the
correlation structure soon.
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 (namely:
gold & silver correlations). On Thursday, we saw something that contributed
to a possible move back to the normal correlations. It is too early to say,
however, that the negative correlation between gold, silver and the mining
stocks and the USD Index is definitely back. What’s normal? Negative correlation
between metals and the dollar and positive one between metals and stocks – just
like you can see in the medium term columns. Why should you care? Because
without this correlation in place, lower values of USD Index may not translate
into higher values of precious metals – this is what we’ve been seeing for a few
prefer to see a few more days of declines in the dollar and higher prices for
precious metals before saying that the worst is over with respect to the upside
down correlations. While it is more likely than not that lower values for the
dollar will coincide with higher precious metals prices, this is not yet
something we would describe as “highly likely”. And this could be viewed as the
answer to the title question: Correlations should be constantly monitored in
order to avoid formulating conclusions and forecasts automatically – someone
who’s heard that “when USD rallies,
could decide to sell
the yellow metal because of the strong
dollar and lose lots of money in the
profits that they would not make – that could be the
case when gold
rallies along with the USD Index, when it’s being pushed higher by the demand
from Europe and Asia. Such scenarios will likely take place some time during
this and/or the following years, so it is important to keep the correlations in
mind and check them before taking big steps regarding your gold & silver
Summing up, the outlook for the euro is bullish for
the short term but bearish for the USD Index for both the short and medium term.
The implications from the currency markets this week are bullish for the
precious metals sector overall, but may have no direct, instantaneous effect
until correlations return to their normal values.
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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Seeing is believing.
All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA 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,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
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Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
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