The S&P 500 Fall And Its Effect On The Precious Metals Sector

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Includes: AAAU, BAR, DGL, DGLD, DGP, DGZ, DZZ, GHS, GLD, GLDI, GLDM, GLDW, GLL, IAU, IAUF, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Bob Kirtley

Summary

A strengthening dollar has an inverse effect on gold and silver and the associated precious metals producers, so gold bugs have suffered accordingly.

The biggest gold producer on the planet, Barrick Gold Corp. gained 9.39% in Thursday's trading session. In stock market parlance, it is unusual for an elephant to sprint, but on this occasion, Barrick proved to be the exception to the rule.

A slight retraction in the dollar and an across the board fall in the financial markets have generated interest in the precious metals sector.

How much of an effect will the Fed's monetary policy in terms of Quantitative Tightening have on this tiny sector?

Preamble

Market sectors are interlinked and what boosts one particular sector can put downward pressure on other sectors. We have seen the recent action by the Fed in raising rates and the boosting effect that they have on the US dollar. A strengthening dollar has an inverse effect on gold and silver and the associated precious metals producers, so gold bugs have suffered accordingly.

The action in the financial markets over the last few days has seen a correction from historic highs as investors decided to take profits and place their investment funds elsewhere. During Thursday's trading session on the NYSE, the DOW Jones was down 545 points, following an earlier fall of some 800 points. The S&P 500 also fell in a similar fashion and both indices closed below their respective 200-day moving average.

It should also be noted that the dollar also lost ground despite the recent rate hikes and the stated intention of the Fed to continue with the policy of rate 'normalization.' Both of these factors helped gold and silver prices to recover and this, in turn, saw investors taking a tad more interest in the associated mining companies. The biggest gold producer on the planet, Barrick Gold Corp. (ABX) gained 9.39% in Thursday's trading session. In stock market parlance, it is unusual for an elephant to sprint, but on this occasion, Barrick proved to be the exception to the rule.

The Chart of the S&P 500

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The above chart of the SPX clearly depicts the fall of this index in dramatic fashion and is now extremely oversold, so beware of a technical bounce at this stage. Also, note that this sell-off was on high volume which suggests that a number of investors had moved their stops up close to the action in order to protect their profits in the event of a correction.

The Chart of the HUI

http://gold-prices.squarespace.com/storage/HUI%20Chart%2011%20October%202018.jpg?__SQUARESPACE_CACHEVERSION=1539312450619

The above chart of the Gold Bugs Index depicts the recent fall below the support level of 180 in what looks like a capitulation of sorts, but it may not be the final one. The recent rate hikes in the US had been supportive of a strong dollar and thus, the gold and silver space were under the cosh. However, a slight retraction in the dollar and an across the board fall in the financial markets have generated some interest in the precious metals sector.

Conclusion

As we have mentioned in the past, the PM mining stocks perform better after Labour Day in the US which was on 02 September this year and this looks to be the case once again.

The main issues that we now have to tackle are as follows:

  1. How much of an effect will the Fed's monetary policy in terms of Quantitative Tightening have on this tiny sector?
  2. Is that it for the financial markets or will the plunge continue?
  3. Is this week's action in the gold mining sector a mere technical correction with the final bottom still ahead of us or is this the start of the next bull market for precious metals?
  4. Is it time that the market rotated out of Tech stocks and looked hard at the unloved, unwanted gold and silver producers?

There are, of course, a myriad of factors that we have not touched on today; however, the above are crucial to one's investment/speculative strategy where gold and silver producers are central to your portfolio.

We have been resisting the temptation to hit the acquisition trail for some time as trying to catch a falling knife just doesn't appeal to us. Allowing the dust to settle is the order of the day, while we try to establish some clear indications that the risk/reward position is skewed in our favour.

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Cheers, Bob K

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