In yesterday's Market Alert we emphasized the bearish USD-gold link and yesterday's price action (along with today's pre-market action) confirms it. The USD moved to new short-term lows and gold didn't move to new short-term highs. Today, the USD just bounced slightly and gold is already down $11.

Gold is responding strongly to dollar's rallies but responds less significantly to dollar's declines. This is a bearish situation as it means that gold would likely decline even if the USD was just trading sideways - and the USD is after a confirmed, long-term breakout, which makes the situation worse for gold. The short-term implications remain bearish.

The low volume that we saw in gold yesterday is also a bearish indication. Please note that volume in the GDX ETF was low as well.

Having discussed the short-term technical situation, we would like to take this opportunity to discuss the bearish points that Nouriel Roubini made while justifying his $1000 price target for gold in 2015. In short, we respectfully disagree with the bearish long-term outlook.

In general, Roubini said that the yellow metal is a “barbarous relic,” with no intrinsic value, used as a hedge against “irrational fear and panic.”

The points that he made against gold are (as published on the Guardian website; we will include our comments below each of them):

1. Although gold can spike when there are serious economic and financial turmoil, it can still be a poor investment. "...at the peak of the global financial crisis in 2008 and 2009, gold prices fell sharply a few times,” he said in the report.

Yes, gold price can move temporarily lower, just like the price of every other asset, which was always the case - the mere existence of this fact doesn't imply any move in any direction in any asset. Gold prices fell sharply in 2008 due to the liquidity squeeze in hedge funds - true - but they came back with a vengeance. At this time gold is approximately 40% above its 2007 high, whereas the S&P 500 is just about 5% higher. The above is not a reason for one to believe that gold will move lower in the medium term.

2. Gold performs best when there is a risk of inflation and despite the massive efforts by central banks around the globe inflation is dropping. "If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation," he wrote.

The proper way to state the fact is to say that the massive increases in the money supply have not yet contributed to increases in the official inflation numbers. As we explained in the article entitled "Gold Corrected on Weeks of Misconception"

3. Gold does not provide an income. “Now that the global economy is recovering, other assets – equities or even revived real estate – provide higher returns,” he said.

Did gold provide an income during the past 12 years when it rallied substantially? A change in that could be something that can make gold prices change their direction - simply restating the obvious doesn't. Does crude oil provide income by itself? No, but does it make it obsolete and by any means make it price move lower?

4. Interest rates, factoring in inflation, are expected to rise, making gold a less attractive investment.

Who's expecting them to rise? Whatever expectation market has should be already discounted in the price. Only a rise bigger than expected can contribute to lower gold prices - that is if we agree that the gold-interest-rates link is that obvious. Let's not forget that gold followed interest rates higher for many weeks and dollars during the previous bull market.

5. There is an increased risk that countries will sell their gold reserves to reduce their debt.

The fact is that countries are actually buying record amounts of gold. If you wan't to buy large quantities of something you'd better not tell people about it because it will drive price higher (remember Brown Bottom?). Instead you either don't mention it or say that you might sell - and buy at lower prices. How to see what's really going on? Ignore official comments and look at the purchases. Paraphrasing the above, the risk is that countries will get better prices then other investors if the latter wait too long with their purchases.

6. The overhyped value of gold from extreme political conservatives. "These fanatics also believe that a return to the gold standard is inevitable as hyperinflation ensues from central banks' 'debasement' of paper money. But, given the absence of any conspiracy, falling inflation and the inability to use gold as a currency, such arguments cannot be sustained." he said.

"Overhyped", "extreme", "fanatics" - these are just words that stem from the beliefs of the author, they are not proofs by themselves. Actually, we can't provide a rebuttal because the above is not really a bearish factor, it's a tautology, more or less. "Given falling inflation the argument about inevitable hyperinflation cannot be sustained" - that's obvious - if the falling inflation is indeed in the cards and it's not the case in our view. No conspiracy? That's a bit hard to discuss, because you can't really prove the lack thereof, nor can you 100% confirm its existence. Other than that the above is another way of saying point number 4 - about inflation - which we have already discussed.

All in all, we still think that gold will move much higher in the coming months, though we think that lower prices will be seen in the following days or weeks.

Summing up, we suggest keeping speculative short position in gold and silver and being out of the precious metals market with one's long-term capital.

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

• Gold: $1,428
• Silver: $23.55

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, 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 has pulled 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 will probably not be reached, but if they do, they will present a great buying opportunity, 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