Gold pulled back to its support levels (no move above the previously broken Fibonacci retracement level was seen - $1,285) and silver tried to move back to the $20 level. Both metals remain below these important resistance levels and it seems to us that the breakdown below them is simply being confirmed here.

Yesterday, we wrote that we were not convinced about the change in the gold-USD link:

"The USD Index moved slightly higher on Friday, to 83.41 and - unlike it was the case in the previous days and weeks - metals rallied. However, if 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 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)."

Yesterday's session was similar to the previous ones, not the Friday one and thus we are still not convinced that anything changed here. Gold moved a bit higher along with a small decline in the USD Index; miners and silver were almost flat.

All in all, what we wrote yesterday remains up-to-date, so we're quoting yesterday's summary below.

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