Gold didn't do much on Friday, but it had done quite a lot earlier last week. As we wrote on Friday, "the level that was reached is the resistance line that we marked on the long-term gold chart with a dashed line (in last week'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."

From the Australian dollar perspective, gold moved to the resistance line created by Dec 2012 and Aug 2012 lows without breaking it. From the British pound perspective, gold closed the week slightly above the rising resistance line, however it will be more important to see if it closes the month above this line as well. Gold priced in the euro didn't move above the rising long-term support line. On average, from the non-USD perspective, gold broke above the declining resistance line based on the April and June highs and above the April intraday low.

There's a very interesting situation in the HUI-to-gold ratio right now. We previously emphasized that this important ratio broke below its 2008 low. Last week, the ratio moved back to this level and then declined slightly once again without breaking it. So far it's just a verification of the breakdown and a bounce similar to what we saw in mid-2012. The move up was significant back then and it looked like the precious metals market would shoot up higher but instead we saw the final top before a move below the previous lows.

You can see the above very well in the silver chart. Speaking of silver, if we are to see another downswing in the prices of precious metals, then the question becomes how high can silver move before it declines once again. In 2008 it corrected 38.2% of the preceding decline in a sharp manner and then declined just as sharply. The analogous price level is at $24.67, so silver can move even higher in the coming days and then still plunge in tune with the previous decline.

The S&P 500 Index moved lower once again on Friday and we saw a second consecutive trading day below the May high. If we see another one based on today's closing prices, we might see more weakness in the coming days - a move to the 1575 - 1600 range in the S&P 500 will become probable. Such a move might trigger another move up in metals even without a decline in the USD Index.

However, if the USD Index rallies strongly, then metals could decline sharply regardless of what happens in the stock market. The USD Index is at its medium-term support line, so it can rally any day now.

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. On the other hand, if we don't see a correction this week, the True Seasonal patterns will become bullish for the precious metals market.

Summing up, the situation on the precious metals market remains very tense. A move down in the stock market could trigger another move up in the precious metals sector, however a move up in the USD Index could trigger a powerful decline. In fact, the latter could happen even if metals move higher from here without a breakdown in the USD Index. All in all, the situation remains mixed.

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