Things got quite volatile on the precious metals market on Friday but this time - contrary to what we saw in the previous weeks - we saw a big daily rally. We exited the short positions right after we saw that metals and miners are moving higher along with the USD Index (when gold was up only $12; it ended the session $34.5 higher) and we decided to analyze the situation several times over the weekend to make sure that our today's suggestions will be as objective as possible. We'll begin with discussing the facts and their implications for the precious metals market and then will move to the overall market outlook which will be followed by up-to-date strategy and investment/trading suggestions.

Gold seen from the USD perspective rallied but it didn't reach our target levels for the next local bottom. The short-term support level based on the lower border of the declining trend channel is currently around $1,150.

Silver closed the week lower than the previous one, but its Friday's rally was impressive. A reversal "hammer" candlestick emerged from a weekly perspective. Silver also moved very close to the lower border of the declining trend channel (didn't reach it, though). The short-term implications are bullish, but on a medium-term basis, little has changed, and lower prices still are likely to be seen in the following weeks in our opinion.

Mining stocks moved sharply higher on Friday, two days after we suggested getting back in with half of the long-term mining stock investments. The XAU Index closed at 82.35 at that time and it closed at 90.15 on Friday - almost a 10% gain in just 2 days. The size of the move and the volume (in the GDX ETF) on which Friday's rally materialized are bullish signs for the short term but - still - neutral for the medium term. Unlike gold and silver, the mining stocks reached their short-term support levels, which was probably the technical event that triggered the rally in the sector.

In Friday's Premium Update (which we create based on Thursday's closing prices plus the overnight information) we wrote the following regarding the gold-to-bonds ratio:

"The picture above illustrates the gold to bonds ratio, but it could as well be entitled “almost”. The strong 61.8% Fibonacci retracement level was almost reached and thus the decline might be almost over. Almost – so we can see lower gold values shortly, but not much lower."

The gold-to-bonds ratio moved to its 61.8% Fibonacci retracement level on Friday and the important support level was indeed reached. This is a bullish piece of information as this ratio is no longer signaling lower prices on the horizon - it's neutral for the short term and bullish for the long term.

Gold priced in the euro moved sharply higher on Friday and closed the week at its 38.2% Fibonacci retracement level - it's a tough call whether the breakdown below this level was truly invalidated or not, but clearly, the picture just became a lot more bullish.

The HUI:gold ratio (gold stocks to gold) moved higher but the move was within norms of the current decline, and there is no invalidation of the downtrend visible from the long-term perspective. The short-term implications are neutral and the situation remains bearish for the medium term.

The CCI Index (proxy for the commodity sector in general) moved to its 2012 low last week, a relatively important support level.

The USD Index moved slightly higher on Friday, to 83.41 and - unlike in the previous days and weeks - metals rallied. However, if the USD Index rallies again, likely to 84.5, then we will likely see another downswing in the metals. In other words, a one-day rally in metals and the USD doesn't make us believe that the overall tendency - strong underperformance of the PM sector relative to the USD Index - has actually changed. The preceding decline in metals was huge and a breather is not that surprising. It doesn't have to mean anything at this point.

In other words, the pullback was likely to happen about now anyway because the whole precious metals market dropped too far to quick. Metals' strong performance relative to the USD Index could still be "noise" instead of a meaningful sign of strength. Is the USD Index done rallying? Not likely. We want to see precious metals and mining stocks rally along with the USD Index on a sustainable basis (AT LEAST a few days of strength in a row).

The headlines that we have been seeing recently are bearish for gold. Over the weekend the homepage of finance.yahoo.com read "Gold Closes Terrible Quarter: What's Next?" and lower "Gold Bugged: Contrarians Not Ready to Give Up Yet," and "Gartman: I Like Stocks, Gold is at Its Worst." While these titles don't scream "sell gold," they give you hints that gold is a bad investment. The amount of these titles has become significant recently and combining both factors has bullish implications.

Please recall that in Friday's Premium Update, in the Gold section, we outlined two possible scenarios and it seems that we are seeing this one play out:

"If we don’t get a sharp drop to the lower border of the declining trend channel, then gold could decline slowly (slower than so far this week) to the support level below $1,100."

We saw gold moving higher on Friday without reaching the support level which fits the above scenario quite well. The USD Index paused a bit but it's still in a medium- and short-term uptrend and it's likely to move higher. It's also likely to negatively impact the precious metals sector when it rallies. Consequently, we don't have a real indication that the decline is completely over and that what we saw on Friday was the final bottom. At the same time the short-term trends remain down. Consequently, it seems that we will see even lower values of gold, silver and mining stocks in the coming days. At the same time it seems that we are relatively close to the bottom given the bearish outlook for gold in the mainstream media.

Gold could move higher from here, but as long as it stays below $1,285, the outlook will clearly remain bearish. If gold stays above $1,285 and we get some kind of a bearish confirmation (rally on tiny volume, move lower in gold stocks, etc.), we will likely suggest opening a speculative short position once again. We were tempted to go long based on Friday's reversal, but since the support levels were not reached in gold and silver, it seems that such a bet is too risky. After all, this would be short-term speculation, and the short-term trend is down at the moment.

Overall, some things changed based on Friday's price action (we closed the short positions) but some things didn't (the overall outlook, the gold-USD link, the trading strategy). Based on how the situation evolves in the coming days (or hours) we will suggest either opening short or long positions in the precious metals sector. We'll send a separate confirmation for the next short position, but we can already provide details for the long position.

Long-term capital: Half position in gold, platinum and mining stocks, no position in silver.

As far as long-term mining stock selection is concerned, we suggest using our tools before making purchases: Golden StockPicker and Silver StockPicker

Trading capital: No positions. We suggest placing buy orders for the speculative long positions in gold and silver for gold at $1,160 and silver at $17,40. We don't have analogous price levels for mining stocks, but it seems that it will be a good idea to buy them when you buy gold based on the $1,160 target.

After the above-mentioned move higher (rally from $1,150 in gold) we expect metals and miners to decline once again and move to $1,090 (gold), $14,70, and 150 (HUI Index). These levels could be seen along with the USD Index at 86 - 86.4. At that time (if we see another downswing), we will suggest purchasing metals and miners at the following price levels (speculative trades):

• Gold: $1,105 (stop-loss: $970)
• Silver: $15.20 (stop-loss: $14.20)
• $HUI: 155 (stop-loss: 137)

These levels are slightly above the price targets to maximize the odds of entering the trade (if everyone thinks that gold will move to $1090 they will buy before it reaches this level and ultimately gold may not drop as low at all).

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 July, 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