There has been a lot of talk about the divergence between the gold physical markets and the financial markets. There is in fact some level of discrepancy between the financial market and the real market, which overall in the longer run should disappear. This discrepancy can help us separate short run speculations from long run movements.

The supply argument tells us that there are cost cushions against further falls after which gold stays low for a prolonged (!) period of time. Especially in the light of the fact that lots of physical gold is being traded in the market. The short-term analysis, however, requires us to focus on other aspects of the market:

• Another US Dollar decline. Is the uptrend threatened?
• The Euro is at the 61.8% Fibonacci retracement level - will the recent rally continue?
• The unusual correlation between silver and the stock market
• Gold price in Euro dollar, British pound and Australian dollar confirm the outlook for gold price in US Dollar
• Gold breakout above the December 2011 low and the August 2012 bottom
• Silver is showing strength recently. We examine the True Seasonal patterns for silver.
• Palladium moved above its upper resistance line and pulled back - what are the implications combined with the analysis of other markets?
• HUI Index attempt to move above the 61.8% Fibonacci retracement level. Another failure?

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Yesterday we saw a very important development in the general stock market which will likely have an impact on the prices of gold, silver and mining stocks. Since the beginning of 2008 we have seen similar phenomena 7 times and virtually in all cases the same pattern followed. Read today's Market Alert for details.

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Key things to keep in mind today:

• Critical situation in the USD Index
• Major signal from one of the most important stock indices
• Gold's performance relative to the USD Index
• Yesterday's price moves compared to the True Seasonal patterns

Today's Market Alert includes a new trading suggestion - it's still not too late to take advantage of it. Sign up now.

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Gold declined slightly yesterday and the same was the case for the mining stocks. Silver was flat, but it seems it wants to move lower based on today's pre-market decline before the USD Index declined. The two developments alone can make one ask themselves: "Is the rally over?"

Naturally, the precious metals sector is not the only asset class that has rallied recently. Copper moved higher as well, touching the neck level of the 2010-2013 head-and-shoulders pattern without (!) breaking it. This means that nothing has changed as far as bearish implications of this pattern are concerned. We saw another pullback which doesn't invalidate the pattern or its implications - which are bearish for the medium term.

On the other hand, the breakouts above the declining resistance lines were not broken in case of gold, silver and mining stocks, so there are some bullish indications as well. Moreover, the general stock market confirmed the breakdown below the May high yesterday, so it could move lower, which in turn could trigger a move up in the precious metals market.

What's the most likely outcome and more importantly, how should one position in this tense environment? That's what we discuss in today's Market Alert.

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Gold didn't do much on Friday, but it had done quite a lot earlier last week. From the Australian dollar perspective, gold moved to the resistance line crated by Dec 2012 and Aug 2012 lows without breaking it. From the British pound perspective, gold closed the week slightly above the rising resistance line, however it will be more important to see if it closes the month above this line as well. Gold priced in the euro didn't move above the rising long-term support line. On average, from the non-USD perspective, gold broke above the declining resistance line based on the April and June highs and above the April intraday low.

There's a very interesting situation in the HUI-to-gold ratio right now. We previously emphasized that this important ratio broke below its 2008 low. Last week, the ratio moved back to this level and then declined slightly once again without breaking it. So far it's just a verification of the breakdown and a bounce similar to what we saw in mid-2012. The move up was significant back then and it looked like the precious metals market would shoot up higher but instead we saw the final top before a move below the previous lows.

The True Seasonal patterns for August generally show a move up in the first half of the month which move is then erased close to the middle of the month. The tendencies in silver and mining stocks are similar - initial move up, and then a slide. The USD Index usually drops in the first few days of the month and then continues to rally peaking before the end of August. It peaks before gold, silver and mining stocks bottom, so there's usually a confirmation of the change in the trend in the form of the sector's lack of reaction to the dollar's weakness. On the other hand, if we don't see a correction this week, the True Seasonal patterns will become bullish for the precious metals market.

The situation on the precious metals market is very tense. Some factors point to higher prices, but some suggest that we simply saw a pullback and that the decline will continue sooner or later. The key question is - what should happen for the situation to become either clearly bullish or bearish? Just as important question is: "how high can gold, silver and mining stocks go before plunging if the bottom is not yet in"? In today's Market Alert we deal with both critical issues. In case of the latter we provide a price target for silver.

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