Plunging stocks to push gold higher?

January 31, 2018 09:30 AM

The bearish case for gold continues as fresh new bearish confirmations have just emerged. You have already read about gold’s huge weekly volume, gold stocks’ underperformance and many other factors. Yesterday’s session provides us with even more bearish details. But, there’s one thing that looks promising for gold bulls – the possibility of a big and sharp decline in the stock market.

Some expect money coming out of the stock market to flow into precious metals, thus pushing their prices higher. As much as we love gold (and silver even more) as a very long-term investment, in today’s analysis, we dismiss the above stock-based hope.

However, before we move to the above discussion, let’s check yesterday’s price performance of gold miners (charts courtesy of http://stockcharts.com).

In short, gold miners broke below all important nearby support levels that could be broken:

The mid-January high.
The early January high.
The late January low.
The 205 level (invalidating the breakout).
The declining, medium-term resistance line (invalidating the breakout).
The rising, medium-term resistance/support line.
The rising short-term (red) resistance/support line.

The implications of the above are very bearish and they are confirmed by the sell signal from the Stochastic indicator.

Still, it is not the decline in gold stocks by itself that’s so bearish. It’s its relationship with gold.

Both of the above charts show that the underperformance of gold stocks is clearly underway. While gold closed yesterday’s session relatively nearby to the previous closing prices, the HUI Index once again closed visibly lower.

Consequently, we see another sizable move lower in the HUI to gold ratio. The implications of this underperformance are bearish.

Having discussed the short-term developments, let’s discuss the main topic of today’s analysis – gold’s link with the main stock indices.

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About the Author

Przemyslaw Radomski, CFA, is the founder, owner and the main editor of SunshineProfits.com.