The non-static, changing correlation between precious metals and equities is something we’ve written about several times in the past few years. We last wrote about this in June in Epic Opportunity in the Gold Stocks. The mainstream is entirely oblivious to the fact that gold stocks (and precious metals) can have rip-roaring bull markets when equities are in a bear market. The precursor to this is two-fold: precious metals are in a secular bull and the correlation between the two has been negative for more than a year. The current negative correlation has been in place for more than two years and now gold stocks have bottomed (in our view) and equities are looking toppy.

There are several examples of this negative correlation. Gold stocks soared from 1973-1974 when the S&P 500 was cut in half. The same thing happened from 2000 to 2002. Also, gold stocks for over 18 months in 1977-1978 began a new cyclical bull market while the S&P 500 declined 19%. This scenario has happened three times: twice in the last bull market and once in the current bull market.

Recent market action suggests that this negative correlation will continue but in favor of precious metals and also hard assets. In the chart below we plot the S&P 500, GDX and CCI (commodities). Since the end of summer in 2011 there has been a clear negative correlation between equities and gold stocks as well as equities and commodities. The tide appears to be shifting as today GDX closed at a two-month high while the S&P 500 closed at a two-month low. A few days ago, CCI closed at a two and a half month high.

This price action shouldn’t come as a surprise as global markets and asset classes are ripe for a shift. The bull market in the S&P is already quite mature while hard assets have been in a cyclical bear for nearly three years. Sentiment on equities (according to the Merrill Lynch fund manager survey, Investors Intelligence or NAAIM data) has been extremely bullish and in some cases even more so than in 2007. Meanwhile, sentiment on bonds (which are also rallying), commodities and precious metals has been extremely bearish since last summer making these markets ripe for a strong reversal.

 Keep an eye on the gold stocks as they’ve been leading the metals and have a tendency to rebound substantially from important bottoms. The chart below shows that GDX is facing a confluence of trendline resistance here at $24. If GDX breaks to the upside then there is no major resistance until $30. That is another potential 25% upside. Your stop-out point could be support at $22.

Conventional thinking could lead you to believe that equity weakness would be a negative for precious metals. While that was the case in 2008, the negative correlation from 2011-2013 and recent price action suggest precious metals (and gold stocks in particular) will benefit from a bear market in equities. Gold stocks have already endured a multi-year bear market. Large-caps shed 65% while juniors lost 80%. Everyone has already sold out of precious metals and piled into US and developed market equities. However, we are seeing signs that the trend is shifting. Over the past month GDX is up 18% and GDXJ is up 27%.  As long as the 50-day moving averages hold, we expect continued gains in the coming weeks and months. 

Good Luck!

Jordan Roy-Byrne, CMT Jordan@TheDailyGold.com

Toyota amazes the public at two major industry events last week. 

At the show, Toyota displayed not only its new hydrogen powered sedan but also its hydrogen tank along with test results demonstrating it was able to withstand impacts from small caliber bullets, .50 caliber rounds barely made a dent.

But Honda probably deserves credit for having the cooler prototype.

….read about all the sudden advances in car technology HERE

1. While global stock markets have not done well since “taper number one” was announced in December, the performance of gold stocks since then has been superb.
2. The FOMC meeting begins today, and culminates with a policy announcement from the Fed, at about 2PM on Wednesday. 
3. Money managers are nervous, because in the past few trading sessions the sell-off in the Dow has dramatically accelerated.   
4. Please click here now.  Double-click to enlarge.  On this weekly chart of the Dow, I’ve highlighted a large and very bearish wedge pattern.  
5. Also, please note the numerous red circles that I put on the chart. Many key technical indicators look like barrels full of investors, going over Niagara Falls.  While a small relief rally is overdue, I would not touch the Dow on the buy-side, unless it falls to the 13,600 area.
6. At that point, investors could begin to buy, using my pyramid generator (systematic capital allocator).
7. The bottom line is that the Dow is already in trouble, after just one tapering event.  One can only imagine the real panic that US stock market investors would feel, if each subsequent tapering event is accompanied by even bigger falls in price.
8. Ironically, the one fundamental event that most gold analysts feared most, QE tapering, is probably what created a powerful surge in the price of gold stocks. 
9. That’s likely because large money managers appear to be unsure as to whether the Fed is really tapering because of increased economic growth, or because of a fear of inflation. 
10. Since money supply velocity has yet to turn higher, the Fed has not addressed inflationary concerns directly. 
11. Regardless, a number of prominent regional Fed bank presidents have stated that the sheer size of the QE-enhanced money supply could potentially lead to a surprising increase in inflation, if velocity starts picking up. 
12. The tapering agenda suggests that the Fed is trying to err on the side of caution.
13. Please click here now.  That’s the daily silver chart.  Silver bullion is the one laggard in this precious metals rally. 
14. Note my stokeillator (14,7,7 Stochastics series), at the bottom of the chart.  The lead line is down to about 43.  Watch closely over the next few days, for a crossover buy signal. 
15. When it comes, the ensuing rally could take silver above both the red downtrend line and the black HSR (horizontal support and resistance) line, in the $20.60 area.
16. A move above $20.60 could attract sizable momentum-oriented buyers, and the entire precious metals sector could then begin a fresh move higher.
17. A week ago, I suggested that gold stocks needed to rest, and traders should book profits.  Profits are golden, only when booked!  On that note, please click here now.  That’s a two hour bars chart for GDXJ (junior gold stocks ETF).  
18. I’ve highlighted a key double top pattern that began forming last week.  GDXJ has now broken down from that.  The stokeillator lead line is down to about 19.  Gamblers who don’t care about the FOMC announcement could buy now, using a tight stop loss order.
19. The $33.40 and $31.25 HSR zones are probably decent re-entry points, and I’ll be acting on them myself, if the pullback extends that far.
20. Please click here now.  This is the daily gold chart.  Gold failed to successfully move above the red downtrend line, but that’s only the first attempt to do so.  It may take a fresh stokeillator buy signal to get the job done!
21. Why did gold fail just above that trend line?  For the probable answer, please click here now.  Using Fibonacci retracement lines, from the August high in the $1430 area, to the December low near $1180, it’s clear that gold stalled near the 61.8% line.
22. Please click here now.  This is a third look at the gold chart.  A small bearish wedge pattern has appeared.
23. Watch the (5,10) moving average series closely.  A crossover sell signal there would indicate that a bigger decline could occur.
24. I realize that most investors in the gold community want to see a serious move to the upside, and that is likely in the works.  Having said that, I don’t think it’s a good idea to be overly concerned with the question of whether the $1180 area is the ultimate bottom or not.  I don’t think that question can be answered, and there’s a lot of key support in the entire $1000 -$1150 area.  If the bottom is in, fine.  If it isn’t in, fine.  Investors should not be overly-focused on a question that really can’t be answered.  Instead, stay focused on the next key buying area, which in the case of GDXJ, is the $33.40 zone!

Special Offer For Website Readers:  Please send me an Email tofreereports4@gracelandupdates.com and I’ll send you my free “Yen To Power Gold” report.  There is remarkable synergy between the Japanese Yen and gold.  I’ll show you why the next intermediate trend move could be to the upside!

Thanks!

Cheers

St 

Stewart Thomson 

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Stewart Thomson is no longer an investment advisor. The information provided by Stewart and Graceland Updates is for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple properly licensed, experienced and qualifed investment advisors and get numerous opinions before taking any action. Your minimum risk on any investment in the world is: 100% loss of all your money. You may be taking or preparing to take leveraged positions in investments and not know it, exposing yourself to unlimited risks. This is highly concerning if you are an investor in any derivatives products. There is an approx $700 trillion OTC Derivatives Iceberg with a tiny portion written off officially. The bottom line:  

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