Gold price moved below our stop-loss level in early trading today, so we suggest closing half of the speculative long position in gold. If silver moves below $32.70, we will suggest closing half of the speculative long position in silver. If the HUI moves below 430, we will suggest closing half of the speculative long position in mining stocks.

Why half? Because according to the Gold & Silver Portfolio principles:

http://www.sunshineprofits.com/research/key-insights/portfolio-structure/
(you will find details on the pictures at the bottom of the page)

we believe that the trading capital should be split between part dedicated to our subjective analysis and objective signals from the SP Indicators. As far as the latter are concerned, we just saw a buy signal from the SP Extreme #2 Indicator, which suggests being long for 2 weeks without placing a stop-loss order for this trade.

You can examine details and reasoning for this approach on the following pages:

http://www.sunshineprofits.com/services-products/charts/sp-indicators/details-and-performance/

http://www.sunshineprofits.com/services-products/charts/sp-indicators/stop-loss-details/

We - subjectively - expect to send you a "get back to full long position" alert soon, however for now we believe sticking to our original "play it safe" approach is a prudent thing to do. This means following the stop-loss orders and getting partially out of the speculative long position in gold and being ready to exit half of the speculative long position in silver and mining stocks.

We believe that long-term investments in the precious metals sector should be left intact.

Having covered the most important and urgent part, let's take a look at the reasoning behind the above.

In addition to today's decline itself, there are two things that are not perfectly bullish for the short run.

The short-term technical picture for the general stock market doesn't look good based on yesterday's price action as stocks formed a bearish shooting star candlestick (moved higher initially only to close the day lower). On the other hand, this candlestick should be confirmed by high volume - and that was not the case. Still, the short-term situation for stocks is now more bearish than not.

Another concerning thing is that the USD Index moved lower yesterday and metals didn't rally - and miners declined. This is not a good sign.

There are also factors that are bullish (and that we didn't cover yesterday):

There was an interesting development based on the previous week. It's visible on the Gold:UDN ratio (which is gold seen from the non-USD perspective) chart. The ratio of volumes between gold and the UDN ETF reached a major high. Practically, it's an all-time high (the ratio of volumes was higher in the first months after the UDN ETF was launched, but that doesn't really count because back then - in 2007 - the volume in the fund "had to" be small because it was right after the funds' launch and since this volume is in the denominator of the ratio, it artificially boosted the ratio's value).

There was only one time when the ratio of volumes (gold:UDN) was similarly high in 2012 - it was the week that begun on May 7th, 2012. The price in this week was one of the lowest weekly closing prices of 2012 and two days after this week ended the final bottom formed. If history is to rhyme here, we could see the final bottom today.

We also saw a similar spike in the silver:UDN ratio (precisely, in the ratio of volumes). The last time we saw that in late August 2012 when silver paused before continuing its rally.

Another ratio that is worth mentioning is the GDX:SPY ratio (shows performance of miners relative to other stocks). The RSI based on it is about to move to the 30 level, which will be a buy signal for the whole precious metals sector.

The Gold Miners Bullish Percent Index suggests that a rally is about to begin or that it has already begun.

The above are important medium-term (!) bullish factors.

Summing up, we remain very bullish for the precious metals sector in the medium term, however today's weakness indicates that metals may need to correct one more time before a huge rally begins and we don't want you to be long if that correction does indeed happen. Was the tipping point reached and is it time to close the speculative long positions? In case of gold - yes, we suggest partially closing the speculative long position. Partially - because half of the speculative capital depends not on our subjective analysis, but on our indicators. We also suggest being prepared to close half of your silver and mining stock long positions, should silver move below $32.70 and HUI below 430, respectively.

Again, we suggest keeping long-term precious metals investments intact.

As always, we'll keep you updated should our views on the market change - even if it means sending another message in several minutes.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA