The Influence of the General Stock Market and Crude Oil on Gold

By: Przemyslaw Radomski, CFA | Thu, May 10, 2012
Print Email

Based on the May 10th, 2012 Premium Update. Visit our archives for more gold & silver analysis.


 

We're getting whiplash from all the political changes in Europe, neo-Nazis in an unstable government in Greece and a changing of the guard in France-- "adieu" to Nicolas Sarkozy. We see plenty of reasons for holding on to our long-term gold positions despite the clobbering the yellow metal got on Wednesday down to a four-month low. The euro tumbled this week against the dollar in the worst run since 2008. There is an intense resurgence of political risk in Europe and a couple of months of weak jobs numbers in the U.S. All that has put stimulus back on the table. Another item on the table is the risk of a Greek euro exit, which has risen to as high as 75 percent; according to Citigroup Inc. We also see a rising anti-austerity tide gaining ground in Europe and the abolishing of a gold excise duty in India, all favorable for gold.

Francoise Hollande has been elected France's president, the first socialist president in almost two decades, on the promise that he would deliver an alternative to the austerity diet. The French have been wondering who had moved their high-calorie cheese. They have become tired of the message reiterated by Nicolas Sarkozy that painful choices and belt tightening will bring jobs and growth. Hollande takes power at a critical juncture for both France and Europe and he will have to deliver fast --no honeymoon vacation. France has a ten per cent unemployment rate and its labor costs are among the highest in the OECD. With a budget deficit for almost 40 years, France lost its triple A credit rating this year. The day after Hollande takes power next Tuesday, France must raise €12 billion on the markets. He then will have to convince German chancellor, Angela Merkel, who was cozy with Sarkozy, to renegotiate the European budget austerity pact to add measures on growth. Investors are worried about potential tension between Germany and France, the two eurozone heavyweights.

It is not likely that Germany will be willing to foot the bill for Hollande's campaign promises.

Having discussed the political factors driving the price of gold, let us now see how the markets can influence the yellow metal's behavior in the days to come. We will start today's technical part with analysis of the S&P 500 Index and begin with the long-term chart (charts courtesy by http://stockcharts.com.)

$SPX (S&P 500 Large Cap Index) INDX

In the chart, we see that prices have moved below the support line created by the 2011 highs, which looks bearish. Taking a relative comparison to the similar rally that we saw in the second half of 2010 (more on that topic can be found in last week's commentary) with the current price patterns, it seems quite possible that we could have simply seen a correction with a rally now to follow.

Let us now take a look at the financial sector.

$XBD (Broker/Dealer Index - AMEX) INDX

In the Broker Dealer Index chart (a proxy for the financial sector), we do not have any clear "buy now" signals (based on this chart alone) but may have some confirmation here that a bottom has formed in the general stock market. This index bottomed at the 50% retracement level of its previous rally, something that could be expected during a correction (just like a bottom being formed with financial at other Fibonacci retracement levels, so, again, this is not a crystal clear buy signal).

Let us now move on to the crude oil market and try to find out whether the black gold will have an impact on the real one's future price.

$WTIC

Looking at the chart we see that prices have moved lower after trying to break out above the declining resistance line. Since that attempt, prices have declined and are now actually close to the long-term support line. RSI levels suggest that a rally is likely to begin sooner rather than later. Another small move to the downside may be seen, and a powerful upturn could follow. The situation will become clearer once oil price finally confirms either a breakout or a breakdown.

Overall, the signs here are blurry but favorable for gold in the short term, as the gold market has been generally aligned with the crude oil market this year. This is not necessarily true for the very short term, but the two markets were generally positive correlated lately and their overall directions are similar. The implications from the crude oil price chart are a bit more bullish for gold than not as the support line is closer than the resistance line and the RSI says "buy".

To finish off today's essay let's have a glance at our in-house developed tool that traces the intermarket dependencies.

Correlation Matrix

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. This week we see that precious metals are negatively correlated with the USD Index and positively correlated with the general stock market. The outlook for the general stock market is more bullish than not, and the implications for precious metals are therefore more bullish than not as well.

Summing up, the situation in the general stock market is mixed for the long term and a bullish scenario seems a bit more likely than the bearish one for crude oil. The implications for gold based on the outlook for crude oil and the general stock market seem to be a bit more bullish than not at this time.

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!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: 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 are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, 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.

Copyright © 2009-2014 Przemyslaw Radomski, CFA

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/