Yesterday we wrote that "[in 1976] there was a pullback in gold before it moved below the initial low. We could see this type of action shortly. If silver and mining stocks consolidate below their previous lows it will simply serve as a confirmation of the breakdown and an indication of further declines." We didn't have to wait long for the pullback to be seen. Gold, silver and mining stocks moved higher yesterday.

Silver's intra-day price action appears particularly encouraging as it moved almost to $20 (below its 2008 high) only to climb back up later. Is the decline over based on that day? We doubt it, as during the 2008 decline huge intra-day and intra-week volatility was the temporary norm after the initial pullback.

We saw the same volatility in case of mining stocks in 2008, and the above analogy applies here as well. Plus, yesterday's rally in the HUI Index wasn't that big when compared to last week's decline. HUI remains below the 61.8% Fibonacci retracement level based on the 2000-2011 rally, so while the breakdown below the April low was invalidated, the more important breakdown wasn't.

The Dow:gold ratio is slightly above 11 - still far from its next major resistance at 12.5. The silver to gold ratio still hasn't plunged which was the case at the end of major declines.

It might have been the case that the trigger for yesterday's rally in metals and miners came from the USD Index which failed to go above the 2012 high and declined back below 84. The cyclical turning point for the USD Index was very close so some kind of consolidation was likely to be seen anyway, so it's not really a big deal, given that we saw a breakout above the long-term resistance line weeks ago and that the trend is now up.

Besides, the high measured by the weekly closing prices in the USD Index in 2012 was close to 83.50, so if the index closes the week above this level, the breakout will still be in.

Summing up, we believe that betting on lower values of gold, silver and mining stocks is justified from the risk/reward point of view. In other words, we suggest having speculative short positions in gold, silver and mining stocks.

The stop-loss levels for the current short positions are:

• Gold: $1,505
• Silver: $25.30
• GDX ETF: $32.2
• HUI Index: 305

We currently think that gold will temporarily move below $1,285, but pull back soon and close that week (the one in which it moves below $1,285) around this level. How low gold will temporarily go is unclear - perhaps it will form an intra-day bottom close to $1,200 or even $1,100.

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

1. When gold moves to $1,305 close the speculative short position in gold and get back in the market with half of your long-term gold and platinum investments.
2. When silver moves to $18.20 close the speculative short position and in silver get back in the market with half of your long-term silver investments.
3. When the XAU Index moves to 84, close the speculative short position in mining stocks and get back in the market with half of your long-term mining stock investments.

We will send a separate confirmation to get fully back in.

As far as trading capital is concerned we currently think that placing distant bids is appropriate. They may not get filled, but if we place them too high, we risk being thrown out of the market via stop-loss orders or margin calls if the volatility gets too high (and it's unpredictable how volatile the markets will get as gold is in a reverse parabola right now). If they don't get filled, we plan to go long after gold pulls back significantly on an intra-day basis on huge volume (thus creating a bullish candlestick - probably a "hammer candlestick").

The distant buy price levels are:

• Gold: $1,120 (stop-loss: $970)
• Silver: $16.20 (stop-loss: $14.4)
• $HUI: 155 (stop-loss: 137)

As we wrote, these levels are distant and probably will not be reached, but if they are, they will present a great buying opportunity and also a one that will likely disappear almost immediately - that's why we we think that placing orders in advance is appropriate.

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 June, 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

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