Gold and silver moved slightly lower today which is nothing to be concerned about given yesterday's sharp move higher. The concerning thing for the very short term is that metals declined during the US session - gold and silver rallied before the markets opened in the US and then corrected some of that move during the session. This is not a good sign, but it's only of very short-term nature. This means that if metals decline today but decline just slightly, it will be nothing to worry about as it would not damage even the short-term uptrend.

The mining stocks' performance was even worse (miners managed to decline even though gold and silver rallied), but still, we don't really "buy" this short-term negative signal because it's much less important than the signal that we saw last Friday - the extreme volume. Our explanation here is that gold and silver investors don't really believe that the worst is over yet and didn't take gold's and silver's rally seriously. Normally, we would view gold stocks' underperformance to gold as a very bearish factor, however, we are right now after a lengthy consolidation, significant decline, and a day with extreme volume - this is not the normal situation.

Let's examine the situation from the emotional perspective - most investors/traders will view a market that has been declining for over 4 months on average as very discouraging and will wait for a bigger rally as a proof of the strength before they enter this market based on gold's rally. If this is the case, and we think that it is, then mining stocks will continue to underperform until the rally in gold is more visible. So far gold was trading back and forth without a decisive rally, which could explain investors' and traders' discouragement and thus declining mining stock prices. The implication here is that once gold is able to sustain the upswing, the miners will come back with a vengeance. Investors and traders will likely think the following: "if gold is moving higher then miners’ profits have to rise eventually and since this sector has taken a beating, it's undervalued at this time, let's buy mining stocks". As soon as some investors think in this way, the price will rise and momentum traders will quickly join as it will be seen as a rebound after a very long decline - creating a trading opportunity regardless of the fundamentals.

If the above is the case, you might be wondering why does it make sense to bet on miners' higher prices instead of waiting for the rally. The reason is that the rally might be too quick and the risk of missing it is too high. Just before the end of August 2012 miners started to rally and it took them only 2 weeks to move 15% higher ($8 in the GDX ETF). We don't want you to miss this kind of move and at the same time we don't want you to take on too much risk and this is why we suggest diversification between long positions in gold, silver and mining stocks (not miners alone). Silver, for instance, has been performing well this year.

Just as we indicated previously, a full speculative long position is suggested for gold and silver, and also for mining stocks.

Naturally, we suggest remaining in the precious metals market with your long-term investments. We sustain our belief that platinum will continue to outperform gold in the following months and it's not too late to take advantage of that.

As always, we'll keep you updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of February, 2013 and we will send additional Market Alerts whenever appropriate.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA