Gold is rallying today. The rest of the precious metals sector is moving only slightly higher.

The interesting thing about this rally was that gold rallied when stocks declined earlier today and then sold off at bit when stocks pulled back. This is a small confirmation of what we wrote in Friday's Premium Update:

"Our second point is the negative correlation between the precious metals and the general stock market. The link has not been as strong in the last few days, as gold and the precious metals have not declined, although stock prices were rising. When a correction is seen in the general stock market or a period of consolidation begins, the precious metals sector could respond with higher prices.

At this time it seems that the precious metals are anti-assets, just as gold is a hedge against turmoil in the stock and currency markets. As investors become more optimistic about these markets, they sell their gold. It does not mean that in the long run gold cannot rally along with stocks. For instance, both are fueled by low interest rates and quantitative easing. This tells us that a short-term consolidation in the stock market could easily have a positive impact on gold."

It's a small confirmation as we've been seeing it for only a few hours. If we see the same type of performance in the following few days, we'll be quite confident that a correction in stocks will be beneficial for the precious metals market, especially for gold.

The big news this week - and the one that is probably behind today's strength in gold - is the Cyprus bailout deal. This video does a good job in explaining what's going on, so please take a look.

In short, the EU officials said that in order to get the bailout money, Cyprus banks have to "tax" the deposits. In other words, bank clients' will be - pardon the expression - ripped off by 6.75% - 9.9% of the money they had in banks. Just like that.

That's not some dictator taking money away from their citizens. As bad as it is, it happens quite regularly and the world got used to that. But if it is the official "order" from the EU, then it means something to investors all around the world. It means that bank deposits are NOT safe. They took almost 10% just like that. Couldn't they take 20% next time? Or 100%? If this order came from the EU officials for one country, couldn't it happen just anywhere? Is anyone's deposit in a bank safe?

Actually, we can understand the motives behind this decision. Cyprus is viewed as one of the tax paradises. By helping the banks located there, EU would effectively be helping all those who were trying to avoid paying taxes in their home country. So, they thought that maybe they would take some money back from all the "wise guys" by forcing banks to take money away from their deposits. In this way, those who wanted to avoid paying taxes would not be given money of those who did pay their taxes in the form of the banks' bailout. So, the decision makes sense from this point of view. However, the external effect in the form of bank runs not only in Cyprus, but all over the world is much more severe and important.

Yes, this makes a series of bank runs quite possible. It undermines the trust in the banking sector overall. Most of all, it puts gold back on people's radar.

Based on the above, we are no longer bullish on the general stock market in the medium term. We are not very bearish either, but we realize that this single event could trigger a medium-term decline in the stock market.

The good thing for us - precious metals investors - is that this sector reacted positively. In fact, this could be the trigger that the market was missing and that was necessary for the medium-term rally to begin.

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 moves 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