The GLD ETF declined yesterday and the decline materialized on average volume - lower than during the recent move up, but still high compared to what we saw in the previous weeks - consequently, it's neither a bullish nor a bearish confirmation. A decline on significant volume would be a bearish confirmation, while tiny volume could be considered bullish - none of them were seen.

The USD Index rallied by about 0.5 and gold declined by only $10. Gold didn't overreact to the dollar's rally as was the case in te previous week (until Friday that is). This is a short-term bullish sign, but it would need to be confirmed before we take it as a long-term signal of strength. For now, we saw strenght on Friday, not much on Monday, and once again, to a small degree, on Tueday.

The above makes the situation particularly interesting. The USD had rallied sharply recently, so it could correct - bullish for gold. Then again, it's in a medium, and short-term uptrend, so it doesn't have to correct - neutral to bearish for gold. However, gold stopped reacting to the dollar's strength - bullish for gold. Then again, it's not confirmed - neutral for gold. The USD Index can rally up to 84.5 before it pauses and up to 86.4 before it stops for longer. This means that gold can stop underperforming the dollar but at the same time keep declining - obviously bearish for gold.

At this time, the current trends suggest a move higher in the USD Index to 84.5 and then to 86.4 - with small pullbacks along the way. Gold would likely decline given a move higher in the USD Index, but the strenght of the decline and the reaction to the dollar's daily rallies could diminish and become very weak in a few weeks. We actually hope to see that happen because it would create a great buying opportunity. When gold reacts mildly to the dollar's rallies and sharply to dollar's declines, and gold moves to one of the important support levels, and at the same time the USD Index is close to 84.5 or 86.4 we will have an excellent moment to enter long positions and perhaps to get fully back in with one's long-term precious metals investments. It seems quite likely that we will see the above scenario unfold and that we will send you a buy alert at that time, but its not the case just yet.

In fact, not much changed based on yesterday's price action. The HUI:gold ratio declined by almost 4% yesterday suggesting that Friday's rally was no invalidation of the previous downtrend, but rather a pullback. Consequently, the general outlook and implications remain unchanged from yesterday.

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