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Precious Metals are Decoupling from the Stock Market

Normally, decoupling from the stock market is a good thing. In recent turbulent times, many have wondered if emerging markets would decouple or if gold stocks would decouple. Its surprising to see gold stocks decouple from a strong stock market. Many wondered if the sector would decouple from a weak market. Yet, the decoupling now could be positive long-term provided the decoupling continues when the stock market peaks just below the 2007-2008 highs.

Below we plot the S&P 500 and the HUI Gold Bugs Index. At the bottom we show the 100-day correlation between the two markets. Note that the correlation has been trending down since the end of 2010. The broad stock market (S&P 500) appears to be headed for a test of major resistance at 1500 while the large cap gold stocks just closed at a 52-week low.

Although large cap gold stocks have closed at a new low, the rest of the sector has not followed suit. The chart below shows GDXJ, the CDNX (Canadian venture exchange) and SIL (silver stocks ETF). While the HUI has closed at a new low, the other markets remain well above their December lows. The CDNX and SIL are showing a strong divergence since October.

Should most of the precious metals sector hold its December lows then it will be very encouraging for the sector even with the large caps breaking to new lows. One can recall 2007-2008 when the speculative side of the sector fell to new lows well ahead of the metals and the large cap gold stocks. One should also keep the 1970s in mind. Large cap miners experienced significant gains at the start of the bull market but not at the end. Sure, the large caps performed well from 1974-1980 but it was the speculative side of the sector that captured the vast majority of the gains.

Presently, the precious metals sector has underperformed badly as the stock market has continued to move higher. We know that it is highly unlikely the S&P 500 is going to make new highs. In fact, in two of the previous three secular bear markets, the market in the second half of the bear rallied to within 5% of the all-time high before falling back into a mild 4-5 year bear market.  This happened in 1909 and 1976. Profit margins, the most mean reverting statistic in finance are already at record highs. Higher interest rates and higher inflation will cut into profit margins.

Everyone loves stocks now and the masses can forget about gold stocks. This is a perfect contrarian opportunity for precious metals investors. The S&P 500 is nearing resistance and the precious metals sector is testing its December low. A successful retest of the low in many markets (juniors, metals, silver stocks) should be a signal that the market has confirmed its bottom. Unless you feel the bull market in precious metals is over then you should use this opportunity to be a contrarian. We may not get another buying opportunity like this for a few years. We invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT

5 Responses to Precious Metals are Decoupling from the Stock Market

  1. RUSS SMITH 03/19/2012 at 11:23 pm #

    Hi!, Readers Of Daily Gold Et Al:

       Such mussings regards gold as appear here & elsewhere have little meaning to those who purchased gold decades ago off the gold dredgers digging as deep as 65 feet along their targeting river bottoms which were purchased for physica possession @ $11 per troy oz without the utilization of a commissioned broker either.  Up price; down price; inflation; deflation or stagflation are of little significance once you purchase gold @ such an economical price, because how can price eventually matter measured in a worthless currency world?  Possession instead of price will be what ultimately matters.  How do you measure the intrinsic value for example of a stock market going to 30,000+ measured by a worthless $?  High $ numbers dispossed of purchasing power no matter how high will NEVER equal the intrinsic value of gold when the chips are down will it?  Everyone must choose their thinking to guide themselves but only physical gold not paper gold demonstrated eternal spending power properties that have already lasted more than 6,000 years of monetary history.    


  2. Frankn55 03/20/2012 at 4:01 am #

    This commentary smacks more of hope than of substance. Save it for a Sunday sermon when we’re more inclined to be religious than practical. None of us who have any common sense
    can understand the lack of respect for gold today but grasping at straws to raise our morale doesn’t cut the mustard. Either we have faith in the intrinsic value of the metal or we don’t.

  3. Trendsman 03/22/2012 at 12:37 am #

    Frank, I think you miss the point of the article. We point out that the PMs have decoupled and it is a bad thing currently. Yet, what happens if equities peak and enter a mild bear market while Bonds are also moving down? That could be the genesis for the start of greater public participation in the resource sector. 


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