The USD Index rallied once again earlier today and this is what we would like to focus on. This, and the fact that Richard Russell just joined the bullish stock camp.

Let's start with what Mr. Russell wrote this week:

"By taking a position in the market, you'll be casting yourself on the side of the optimists, and you’ll also be casting your vote on the side of Ben Bernanke and the Feds (...) Besides, it’s fun to be able, for once, to place yourself on the cheerleaders’ side of the U.S. markets, and it makes sense to be on the side of America’s Federal Reserve."

Since Richard Russell is, or actually, was one of the most popular voices favoring gold over stocks, this could be viewed as a contrary sign that the bottom in gold and a correction in stocks is at hand. Of course, we respect Mr. Russell's work and we realize that his comments are based on both Dow Jones Averages: Industrial and Transportation moving above their previous highs, but examining the words that he chose (like "casting your vote on the side of the Fed") suggests that maybe the sentiment has just become too positive for the stock market. We will comment on the gold-stocks link in tomorrow's Premium Update.

Moving on to the USD Index, let us remind that the July 2012 high was 84.10 and it was one of the major highs, so it's relatively important from the technical perspective. Given the current momentum and the fact that there is no significant short-term resistance level between this level and the current 83 level, we may see the dollar move up to this level before the top is seen. If the dollar keeps the pace at which it's been rallying recently, we might see this target reached as early as next week. If you've been following our chart analysis for some time now, you know that next week we will also see a cyclical turning point in the USD Index, which makes the above scenario even more likely. Yes, the turning point didn't work out in the last case, but it had worked in most previous cases so it's still likely to contribute to the dollar's top next week.

What impact will this have on gold and silver? No significant, in our opinion, at least until the dollar declines. The precious metals market stopped declining, on average, after the last turning point in the USD (yes, the dollar cycle didn't work for the dollar itself, but it did in the case of metals) and no longer responds negatively to the dollar's rallies. Consequently, we might have to wait a few extra days before the rally in the metals really kicks in. At the same time being in the market seems to be a good idea as there is no guarantee that the USD Index will indeed move that high. In the situation when a rally in the dollar means nothing for metals and a decline in the dollar means a rally for metals, staying long metals is a great idea, in our opinion.

Full speculative long positions are suggested for gold and silver and mining stocks.

Naturally, we suggest remaining in the precious metals market with your long-term investments. In particular, don't let the bearish analyses, declining prices or sideway movements make you sell your long-term precious metals investments. It's a good time to be adding to the long-term gold & silver investments, not a bad one.

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 March, 2013 and we will send additional Market Alerts whenever appropriate.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA