Benefits of the Best Tool for Precious Metals Correlation Analysis:
- Displays the "big picture"
The Correlation Matrix shows the markets that influence gold, silver, gold stocks and juniors. It gives you an advantage over most investors that focus on the precious metals market alone. Technically, "correlation does not mean causation", but we know that the biggest markets influence the smaller ones - the tail doesn't wag the dog. Consequently, i.a. Gold / USD correlation means USD's likely impact on gold, and Silver / S&P correlation means general stock market's likely impact on silver. Of course, the price of gold impacts the profits (and thus share prices) of gold producers, not the other way around. To make it clearer, the market that we are trying to "explain" is first, and the market that is used to explain the behavior of the first market is the second one in each row.
- Shows you how much the markets have moved together in the past
It estimates the strength of influence that a particular non-PM market is about to have on gold, silver and corresponding equities in the coming days/weeks/months. The correlation coefficient ranges from -1 to 1. A negative value means that a particular pair of markets moves in the opposite direction on average. A positive value indicates movement in the same direction. The closer to -1 or 1 the number is, the stronger the link between the markets. The closer to 0, the more unrelated the markets likely are. To make the distinction easier, we used colors. A green arrow means strongly positive link, a red arrow means strongly negative link, and a yellow arrow means rather weak link.
- ...And that are likely to move together in the near future
It enables you to pay attention to the markets that show the future trends. It also enables you to detect a possible catalyst of either a breakout or a breakdown. The correlation that has been in place recently is likely to continue to remain intact in the near future. The short-term (based on 30 days) numbers change much more quickly than the ones based on more medium- (90 days) or long-term (750 or 1500 days) values. The more short-term price move or trade in mind one has in their mind, the more short-term column one should check. For short-term trades, the 30-day column is usually most useful. The 10-day column changes too quickly to be used on its own - it's provided just as a very early indication of where the 30-day column might change shortly.
- You are holding cash, but are considering buying gold for a short-term trade. You check what gold has been doing recently, and it appears that gold is likely to rally, but you are not convinced. At the same time, you look at the USD Index and you are almost certain that it's going to rally. You check the 30-day correlation column and see that value is 0.91 (very close to 1). This is unusual, as in most cases, gold moves in the opposite to the USD Index. Nonetheless, it appears that if the USD Index rallies soon, then gold should be impacted in a positive manner. This gives you the additional confirmation of the early idea to buy gold. In case of this example, after buying gold, the odds are that both: USD and gold would move higher and you would profit.
- You are considering buying silver as a medium-term trade, but are worried that the general stock market's slide might cause silver to decline as well, which would allow you to buy at much better - lower - prices. You check the value of the 90-day column for silver and it's -0.2. You additionally notice that the value for 250 and 30 day columns are at 0.15 and -0.23, respectively. You conclude that there is currently no meaningful link between silver and the general stock market (even despite silver's multiple industrial uses), so you know that even if stocks fall, silver is unlikely to be affected. You buy silver and even though the S&P 500 falls, silver declines modestly for just 2 days, after which it soars back up. Ultimately, stocks' decline didn't matter and your profits in this example were barely affected.
- You are considering buying gold stocks (senior producers, so the proxy is the HUI Index) for a short-term trade, but you think that gold is topping and you are wondering if this is really going to prevent miners from rallying higher. You check the 30-day column and the correlation value is 0.8, which is fairly strong and positive. This means that if gold is topping, then mining stocks are quite likely topping as well. You decide that opening the long position in the mining stocks is too risky and you are saved from making a bad trade, as gold - in this example - soon declines along with gold miners.
- USD - USD Index
- S&P - S&P 500 Index
- HUI - (proxy for )
- CDNX - Toronto Stock Exchange Venture Index (proxy for - many juniors are included in this index)
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September 21, 2020, 11:21 AM
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