Precious metals moved higher yesterday and our stop-loss levels were hit - at this time we suggest no speculative position in this sector.

The gold:UDN ratio corrected 50% of its recent plunge. The same can be said about spot gold and the GLD ETF. In yesterday's Premium Update we created retracement levels based on different tops in case of spot gold and GLD ETF, but the point remains - another resistance level was hit on Thursday.

There is one more important resistance level that was just reached in case of gold. On the long-term gold chart that we've been featuring in our updates, you can see two rising red support lines. Actually, only the lower one is still support - the upper one (based on weekly closing prices) is resistance and it is the latter that was hit yesterday. Assuming that long-term trendlines based on weekly closing prices are important (they are in our view), we can view the current move higher so far as a verification of the breakdown below this level. A continuation of the rally would mean a come-back, but for now we don't see it.

Here's something that we see. If you take a look at the GDX:GLD ratio and compare miner's performance to gold's moves, you'll see the same pattern that we've been seeing since November 2012 - nothing more just yet. Decline, pullback, consolidation, decline, pullback, consolidation, and so on - the pullback that we saw in the past 2 days is more or less just like the previous pullbacks in this pattern. Further outperformance would be bullish, but for now, we remain skeptical.

The GDX ETF (proxy for mining stocks) has corrected to its first Fibonacci retracement level and hasn't moved above it. There are no technical indications to believe that this is more than a correction. It rallied on Wednesday, but barely moved higher yesterday when gold went up about $36. The HUI Index was up by only 2 index points.

Silver moved higher - finally - but a one-day event that doesn't move silver above important resistance levels is not enough to impact the medium-term picture.

Physical demand is strong, the fundamentals remain bullish, but that doesn't mean that precious metals can't decline in the next several weeks. Was the situation on the silver market bullish - fundamentally - at the beginning of April 2004, end of April 2006, March 2008, and April 2011? It was and it still is, but still, silver plunged after each of these dates. We were asked to include the discussion of fundamental factors in our analysis. And we have been doing that for a long time - each Premium Update and some Market Alerts include links to certain parts of our website, like Key Insights (including Gold Portfolio details) and the Reports section. For example, the CME has recently raised margins on precious metals - we have pointed you to a report in which we research this topic (and, to our knowledge, there is no report available that would be more thorough than the one that we have provided) and provided you with a short summary right in the alert if you didn't have time for reading the whole piece.

The precious metals market is likely to move much higher eventually, perhaps even skyrocket (quite likely in case of silver) but it's been likely for years - it's not something that changes from one day to another. We are taking it into account each day - by having the "insurance" category in the portfolio. Since it doesn't change each day, we don't comment on it each day. Sure, there are some additional factors confirming it that emerge every now and then (like strong physical demand right now) but since they simply confirm what we believe and have been taking into account while making suggestions, we don't repeat ourselves in that regard in every alert and update. Instead, we comment on things that do change on a short-term basis.

The most similar decline to the current one is the 2008 one. Here's how it looked:

1. 2 weeks of severe declines (throughout the sector)
2. 2 weeks of pullback (particularly weak in case of silver and miners; if you take a look at the sharp plunge only - gold corrected 50% thereof)
3. 2 more weeks of declines
4. Again 2 weeks of pullback (even more significant underperformance of silver and mining stocks)
5. Approximately 4 weeks before precious metals bottomed

At this time we have precious metals after 1.5 weeks of the first pullback.

Our point with the above analogy is that the current pullback doesn't look any different from what we saw during the 2008 plunge. At that time it was the liquidity squeeze that triggered the sell-off, but just because it's no longer the case, it doesn't mean that prices can't decline - they can based on other temporary reasons, like the recent increase in margins for gold and silver or based on the technical breakdowns below major support levels in gold, silver and mining stocks.

Finally, we are entering the time of the year when seasonal tendencies are becoming quite important. Generally the precious metals market used to form a local top in early May, bottom in mid-May, move higher until the end of the month and decline significantly in June. We will be in "early May" in just a few trading days, so the implications are rather bearish.

Summing up, at this moment we suggest neither an open speculative nor an open investment position in gold, silver and mining stocks. If we get a confirmation that the next downswing is beginning, we will suggest re-opening short positions, and if the above-mentioned patterns are broken, we will suggest getting back on the long side of the market.

Here's the up-to-date version of our trading/investment plan:

1. When gold moves to $1,305 open a long position in gold (with $1,268 as a stop-loss level).
2. When silver moves to $18.20 open a long position in silver (with $17.65 as a stop-loss level).
3. When the XAU Index moves to 84, open a long position in the mining stocks (with 80 in the XAU Index as a stop-loss level).

The above are also the levels at which we suggest getting back on the long side of the precious metals market with half of your long-term investments. We will send a separate confirmation to get fully back in.

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 May, 2013 and we will send additional Market Alerts whenever appropriate. We have prolonged the time in which you - our subscribers - will receive Market Alerts daily for another full month.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA