In the previous essay dedicated to gold and silver I summarized that "the very-long-term price projections are still in place and paint a bullish picture for long-term investors holding gold, silver, and corresponding equities. On the other hand, the short-term outlook remains bearish for the precious metals market."

This week, I'd like to provide thoughts on the precious metals stocks sector. After all, precious metals usually move along with the corresponding equities, so analyzing precious metal stocks is useful even if you're interested in trading/investing in metals only.

Let's begin with the long-term chart of the HUI Index:


Source: stockcharts.com

Generally, there are virtually no changes in the long-term picture of the HUI Index since we covered this situation previously, so we'll just include the previous comments, as they are up-to-date also today:

Please take a look at the thin blue lines coming from the same price/time combination. Each of them was pierced, before the final bottom was put in, and this is what I expect to take place this time.

... taking the historical performance of the gold stock sector, it seems that precious metals will need to move a little lower before putting in a bottom.

The HUI Index has just moved to the rising support line, so if it manages to break below it, this may mean that the final downleg for this correction has begun. Let's turn to the short-term chart for details.


Source: stockcharts.com

The analysis of the short-term chart suggests that the precious metal sector might have already begun the second part of the decline.

First of all, please take a look at the volume, which failed to increase along with higher price on Monday, January 11. The volume did in fact increase, but during the move lower on Tuesday, January 12, which is a subtle clue that these declines are something more than just noise.

We have emphasized in the past that the corrections on the precious metals market often take the form of a zigzag, which by itself suggests that another move lower is likely. Moreover, in the case of precious metal stocks, the second part of decline tends to be similar to the first one. Therefore, we have extrapolated the previous move to the current one (assuming that the decline began on Monday), and the result for the Market Vectors Gold Miners ETF (GDX) is that the bottom is likely to happen in a few weeks at around the $42 level, which is slightly lower than the previous bottom.

Naturally, things may (and often do) change very fast on the market. One of the ways to detect which change may take place is to check what other market might influence prices of a given asset in the future, and then analyze it with appropriate (here: precious metals) perspective.



Our correlations table provides details as far as the strength of the influence from the USD Index and the general stock market is concerned. These are the two main driving forces behind the short-term price swings.

Previously I wrote:

... the fact that in the past 30 trading days precious metals moved on average in the opposite direction to the general stock market (which is not in tune with the historical norms for precious metal stocks and silver) is very important. These numbers suggest that right now we shouldn't rely on the signals from the general stock market as far as timing precious metals is concerned.

The correlation coefficient for silver and S&P 500 is now positive, but it's so low that it practically equals zero. This means that a breakdown in the general stock market doesn't need to have a direct influence on the precious metals market.

Summing up, precious metals aren't reaching new highs since several weeks, so it's understandable that investors holding gold and silver are discouraged by the performance of their favorite asset class, especially the signals that this isn't the end of the corrective phase.

On the other hand, the short-term weakness doesn't damage the long-term bullish picture for the sector.