Changes on the General Stock Market - Will Silver Decline?

This essay is based on the Premium Update posted on December 17th, 2010

The past week has failed to provide clear signals in most markets worldwide. Perhaps the uncertainty of the financial stability of several European countries further compounded by normal holiday and year-end influences have thus far made December a difficult month to read.

As we have stated in our previous essay, even though the trend for the USD Index appears to be up, the impact that currencies have on gold, silver and mining stocks is quite unclear. However, this is only the only interesting thing as far as influences on the precious metals market are concerned. A major change could be in the cards regarding the relationship between stocks and precious metals. The situation is therefore complicated by stock market uncertainty as well as the changing relationship they have had with precious metals.

While uncertainty looms large over the state of the precious metals market, we analyze a few key indicators to comprehend fundamentals.

Namely, gold and the general stock market appear to have a strong positive relationship in the short-term or 30-day column. However, the 10-day column clearly shows a reversal of this relationship from positive to negative. This can also be seen for the relationship between HUI and silver with stocks as well.

If you didn’t read our previous essays, and the above numbers appear perplexing, here’s a short introduction – the greater the number (and more upward and green arrow accompanies it) the more positive influence a given market is likely to have on precious metals. The smaller the number (and more downward and red arrow accompanies it), the more negative influence a given market is likely to have on precious metals.

Simply put, there are no sure bets at this time as to how precious metals prices will move in relation to general stock market trends.

Much of the lack of clarity across the precious metals sector is related to risk/reward ratios. Sunshine Profits does not favor high risk moves regardless of the profit potential. We believe that speculative capital should be placed in the market when the risk/reward ratio is favorable.

The uncertainty of today is clearly visible when comparing the 10-day column with the 30-day column in this week’s matrix. It seems that an exact turnaround has taken place in how stocks relate to precious metals. This is quite unusual and increases the risk portion of the normal risk/reward ratio at least for the near-term.

So, at this point it might be best to turn directly to the chart of gold (charts courtesy of stockcharts.com).

The long-term GLD ETF chart provides a closer look at the current position of gold’s price with respect to resistance and support levels. It can also be seen that when gold’s price declined several weeks ago, it was very quick and was ultimately stopped by the 50-day moving average and its rising support line.

History repeats itself to a considerable extent, so if we had a similar alignment of both support levels and price reached them after a sharp decline, with high probability of being correct we could state that the decline is over. However, at this time the 50-day moving average is below the rising support line, and even though broken though the latter it stopped at the former level (50-day MA). Moreover, the decline has not been rapid. Consequently, it is possible at this time that further declines may be seen.

Meanwhile, the big hero of the recent rally – silver – appears to have gotten ahead of itself. Of course, a correction in silver’s price is healthy for the long-term strength of subsequent rallies. Furthermore, it provides investors an opportunity to add to long positions at lower price levels, long-term Investors should be on a constant lookout for such buying opportunities.

On the long-term above chart, some mixed signals are apparent. Silver has indeed held above the rising support level, the red line in our chart, and it remains within the rising trend channel. The latter is illustrated by the two parallel black lines in this week’s chart.

Conversely, note that silver has not been trading above the November intra-day high in recent days. It is perhaps likely that a decline below previous local bottoms could be seen in the near-term. Should that take place, the 50-day moving average will likely once again provide support.

In the short-term chart this week, we see mixed signals one more time. Current price levels are slightly below previous intra-day highs (which is bearish for silver) and slightly above the rising support line (which is bullish).

Gold, silver and mining stocks normally tend to move in similar fashions, frequently reaching local tops and local bottoms together. It is important to watch gold and the other precious metals markets when investing in silver as they frequently impact silver‘s price directly.

Summing up, the long-term outlook for the white metal is bullish although the short-term appears unclear and very much mixed at this time – with a slight bearish bias. As the saying goes “when in doubt, stay out“. Any speculative positions in silver should be opened only by the most risk-tolerant Traders.

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

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