The decline in gold, silver and mining stocks continues more or less as expected - it's similar to what we saw right before the big drops in April and June. The most interesting fact in our view is that the underperformance of gold relative to the USD Index seems to be becoming more visible. Yesterday metals and miners declined (the decline was slight in case of silver and miners, but still) along with a small decline in the USD Index. We've been seeing more of the same so far today. No move in the USD and a drop of about $10 in gold.

We were asked to comment on the copper market and we would like to reply to this question today:

"Copper is flirting with the $3.00 support zone and it appears that it may eventually make the plunge. Should this occur, what would be the implication for the PM markets, especially gold and silver?"

In short, this would likely take precious metals lower and, in fact, could be the catalyst needed for the final big drop to begin. Let's take a look at the following chart to see what may follow:

Silver will be likely impacted most heavily and it seems that miners will be affected to a greater degree than gold too. This was the case previously and it has a fundamental explanation as well. The industrial usage. Given its unique properties, silver has multiple uses and is more of an industrial metal than gold is. In fact, one might say that silver is somewhere between gold and copper. It sometimes acts like a precious metal - following or leading gold's footsteps, and sometimes it's more correlated with the stock market (and copper), due to its industrial usage.

With plunging copper, we could see a big drop in gold and a much bigger drop in silver. Please recall that we have been expecting to see silver's sharp underperformance at the end of this decline and the situation in the copper market seems to fit this scenario very well. Falling copper could ignite a big decline in the silver-to-gold ratio and create a technical situation which previously was seen right before major bottoms.

Copper itself could move to the $2 - $2.3 area before bottoming, as this is where two strong support levels intersect: the rising long-term support line and the Fibonacci 61.8% retracement level based on the entire 2001 - 2011 rally. This level is also in tune with the target based on the big head-and-shoulders pattern which has already been completed and verified.

All in all the outlook remains bearish for the precious metals sector.

To summarize:

Long-term capital: Half position in gold, silver, platinum and mining stocks. As far as long-term mining stock selection is concerned, we suggest using our tools before making purchases: the Golden StockPicker and the Silver StockPicker

Trading capital: Short positions in gold, silver and mining stocks.

We are not ruling out the case in which we're going to see a breakout today (which is not likely, even though another small move higher could be seen), and in this case the short position would have to be closed. Consequently, we suggest placing the following stop-loss orders:

• Stop loss for gold's speculative short position: $1,356
• Stop loss for silver's speculative short position: $20.90
• Stop loss for the HUI Index's speculative short position (theoretically, as you can't short the index by itself): 273
• Stop loss for GDX ETF's speculative short position: $29.40

We suggest placing buy orders for the speculative long positions in gold at $1,105 and for silver at $15.20 (and closing the short position at that time - if these levels are reached). The analogous level for the HUI Index is 155. If gold moves to $1,105 but other market don't move to their targets - we suggest closing short positions in gold, silver and mining stocks and going long these sectors anyway. If silver or the HUI reach the target but gold doesn't, we suggest closing all above-mentioned short positions, but going long only the market that has reached its target. In this case you will likely hear from us shortly, but you know what our take is even before that happens.

Entry levels and stop losses for the above rather-soon-to-be-opened long positions:

• 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 August, 2013 and we will send additional Market Alerts whenever appropriate.

As a reminder, Market Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent we will send you an additional small alert before posting the main one.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA