Gold closed at $1,365.90, which is a move above the April low. This breakout is not confirmed, though. We would need to see 2 additional, consecutive closing prices in order to confirm this breakout. The level that was reached is the resistance line that we marked on the long-term gold chart with a dashed line (in yesterday's Premium Update). The next strong resistance - a long-term one - is relatively close, approximately at $1,400. This resistance is the rising line based on 2005 and 2008 bottoms. Gold broke below it in June when it started a sharp decline. Meanwhile, silver and mining stocks moved to their June highs and showed strength once again.

In fact, miners and silver continued to show strength against gold and gold showed strength against the USD Index - and this is a bullish combination.

Stocks have moved below their May high, also in terms of closing prices. Stocks can move all the way down to their 2007 high without damaging the medium-term bullish outlook. On the short-term the situation is a bit mixed, because on one hand we have seen a breakdown, but on the other hand it has not been confirmed.

So, what's not to like about the current rally in the precious metals sector? The situation in the USD Index. Yes, gold performed strongly against USD in the past few days, but the rally in the dollar was relatively weak and perhaps it was not enough to trigger the regular action. The USD Index is very close to its cyclical turning point (just a few more days) and it's once again at its medium-term support line. It seems very likely that the USD Index will rally and that the coming rally will be significant.

If gold holds very well against the dollar's rally - say above 83, or we see a confirmed breakdown in the USD Index below the rising medium-term support line, then we will have a powerful bullish combination and a good moment to enter long positions (unless something else changes, that is). Until we see one of these two events, the move up in the precious metals sector will be a risky bet, especially given the fact that during the only similar decline to the current one (the 2008 one) the entire precious metals sector rallied significantly, which was followed by a much bigger and very volatile decline.

The True Seasonal patterns for August generally show a move up in the first half of the month which move is then erased close to the middle of the month. The tendencies in silver and mining stocks are similar - initial move up, and then a slide. The USD Index usually drops in the first few days of the month and then continues to rally peaking before the end of August. It peaks before gold, silver and mining stocks bottom, so there's usually a confirmation of the change in the trend in the form of the sector's lack of reaction to the dollar's weakness.

Again, given today's market situation, we can expect the USD Index to strengthen more than on average. Will the precious metals market refuse to move lower when that happens? Nobody knows. However, we do know that precious metals are in a risky position, vulnerable and a major slide may still be ahead because of the analogy to 2008, and because of the fact that the USD Index is at a strong, medium-term support line.

To summarize:

Long-term capital: Half position in gold, silver, platinum and mining stocks.

Trading capital: No positions

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