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Transportation-Industrial Stocks Ratio Hints at Higher Precious Metals Prices

April 9, 2013, 9:50 AM

Based on the April 5th, 2013 Premium Update. Visit our archives for more gold & silver articles.

It seems that recently the whole precious metals sector has been devoid of the strong relationships with currencies and stocks (namely, strong negative correlation between gold and silver and the USD, and a positive one between metals and the S&P 500 Index) that we are so much used to, which makes the straightforward inference somewhat more complicated. But it is still beneficial to monitor the above-mentioned markets – firstly, in case these interdependencies get back to normal and secondly, to see if any important buy and sell signals are flashed. The outlook for the gold price in April, 2013 remains rather unclear if you take a look at the gold price charts only, so let’s examine other markets in order to see if there’s anything on the horizon that could drive gold prices higher or lower shortly. We’ll start with the USD Index very long-term chart (charts courtesy by http://stockcharts.com.)

Very long-term US Dollar Index chart

The index has been trading at about the same level and pretty much sideways for some time now. On the above chart you can see it as a pause. Comments made in one of our previous articles remain up-to-date:

The breakout here is now quite significant, and we must consider the possibility that the USD Index might move higher in the medium term. The situation in the short term, however, is overbought, so it is likely that we will see the index decline soon and then we’ll see what happens next.

If the correction stops at the declining support line, around the 80 level, then the breakout will be confirmed, and a rally will likely follow. If however, the correction takes the index below the 80 level, the whole breakout will be invalided, and lower values would probably follow. At this time, the medium term and long-term outlooks are somewhat unclear based on this chart alone.

Let us move on to the short-term picture for the U.S. currency.

Short-term US Dollar Index chart

We see a breakdown below the rising short-term support line here. This chart is a bit bearish, at least more bearish than it has been in previous weeks. The RSI level is no longer overbought and the decline is not visible yet, but the breakdown was confirmed.

Although we cannot rule out a move to the July 2012 high before the next decline, an immediate decline appears possible now. Such a move could finally trigger a rally in the precious metals. This is no sure bet, however. Recent moves to the downside in precious metals prices while the USD Index was also declining were not very encouraging.

Now, let’s have a look at the EU currency from a long-term perspective.

Long-term Euro Index chart

The index level is right at our expected bottom now. It moved to the lower bottom of the target area and then reversed. This target area is based on the 50-week moving average and the previous low.

We have illustrated an analogy between current trading patterns and those seen in 2010 with red rectangles in this week’s chart. Back then the bottom formed at about the point where we are today in the current trading pattern: between the 50-week moving average and the previous local low. A bottom forming now would make the situation more bearish for the dollar. It seems that the Cyprus events have caused the euro to decline recently and now – as the situation gets less and less coverage – euro moves back up.

Let’s move on to the general stock market now – we’ll use S&P 500 Index as a proxy here.

Long-term S&P 500 Index chart - General Stock Market - SPX

In this long-term chart, we see that there has been no breakout although stocks did move higher early in the week. Overall, the situation has not changed so much in the past two weeks as stocks are still overbought and the RSI level remains above 70. It seems that another breakout attempt is quite possible so the very-short-term trend remains up.

What happens after stocks move to their 2007 high is unclear, but it’s very likely that the reaction – whatever it will be – will be important. If stocks break out and then invalidate it, and at the same time precious metals move to/below their key support levels and then invalidate such a breakdown, we will have a very bullish and very important signal for the precious metals market.

We’ll now have a look at our final chart for today – transportation-industrial stocks ratio – which has bullish implications for the whole precious metals sector.

Dow Jones Transportation Average Index

Here, we see an important development this week as the transportation stocks declined. This resulted in a significant decline in the ratio and the ratio has been inversely correlated with the precious metals for some time now. This relationship has been quite strong week-to-week, especially since last August. It seems that at this time, it could have positive implications on the precious metals market. So, in short, a lot has happened, but not much has changed yet.

Summing up, the USD Index is quite likely to decline shortly, even though the very short-term implications are not as clear as we would like them to be. Early week declines in the USD Index did not cause precious metals prices to rise, they actually declined as well, so the implications are not clear at this time. We have seen a positive clue in the declining transportation-industrial stocks ratio, which could have a positive impact on the precious metals. Overall, the implications are unclear to a bit bullish for the very short term. Once the S&P moves above its 2007 high or fails to do so and declines significantly, we will have a clearer picture here.

There is one factor that greatly increases the clarity of the current situation for the following 1.5 weeks, 4.5 weeks and then the following month and it's described in this week's Market Alerts. Please join our subscribers to learn more about it and evaluate the impact on your portfolio.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA

Feb Market Overview

Gold Market Overview

In the recent years, the Federal Reserve dropped inflationary bombs on the market and some commentators believed that the US dollar would soon evaporate. It hasn't and, in fact, the USD Index has been moving higher since 2008. Why? How is that possible given all the dollars that have been "printed" since that time? Doesn't the basic law of supply and demand work anymore? In the February 2014 Market Overview we analyze this critical issue and - as always - we discuss the implications for the gold market.

Read more in the latest Market Overview report.

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