Gold Stock Review

Strong hands continue their attempt to drive out the weak in the gold stocks (and gold) on worries that another sharp decline in equities is imminent. Even if that is the case, does it matter?

Does the trend in equities, S&P 500, set the direction for the gold stocks? While the gold stocks and equities tend to move in the same direction over the long term, the strength and direction of that correlation can change with economic conditions. For example, long-term asset correlations illustrate how the gold stocks and equities can move inversely during depressions such as 1929-1942. The strength of the long-term correlation can weaken during periods of devaluation such 1968-1980. Both of these periods are characterized by dollar devaluation. The constant between the two periods is the strong correlation, greater than 0.80, between gold and gold stocks.

Fear, however, tends to give little consideration to historical facts. The assumption that naked shorts will alter the historical correlation between gold and the gold shares in 2000-2025 is a big one.

The downside force in the gold stocks continues to weaken. The test and close above the breakout gap on shrinking volume are bullish setups. There could be few or many of them. The intensity of fear right now favors the latter.

Amex Gold Miners Index ETF (GDX)


Quick look at TRE shows shrinking volume at neckline support. The window of time is also open. Buckle your seatbelts. TRE's tape is growing in size. This suggest an increase in violence and emotions going forward.

Tanzanian Rty Explr Co (TRE)


Source: Definition of correlation