Gold declined today by more than $30, following an initial move higher. What does it mean / change? It means that the gold market is weak because the move down wasn't accompanied by a move higher in the USD Index and, at the same time, it means that the head-and-shoulders formation has just been completed (gold moved below $1,295).

We wrote that gold market was weak and that the next big move is likely to be to the downside, but actually, gold is even weaker than had expected. Based on the completion of the H&S pattern, and the previous completion of the pattern in case of mining stocks, it seems that the next big move lower is underway.

Let's check what used to happen at this time of the year. After all, that's the default mode for the market - if there were nothing visible on the market, no particular formations, trends or other tendencies, we would expect the market to move along with its True Seasonal patterns.

In the first few days of October, the USD Index tends to move higher and then declines until more or less the middle of the month. Then it rallies some more. The second rally is usually smaller than the first one, but it's effect on gold price and mining stocks is much more visible.

Gold usually declines in the first days of October (as USD strengthens), then moves back up and even rallies 1% above the Oct 1 price (close to Oct 10). Then it declines for about 2 weeks.

The performance of gold stocks is even more interesting. They usually decline about 3% in the first few days of October, then move back to where they were at the beginning of the month around the 10-th day of the month and then decline heavily (6% on average). Overall miners tend to underperform metals - confirming the bearish outlook.

At this time, however, the precious metals market is particularly weak and we could see something more than just small weakness in the first days of the month (and today's decline serves as an example). Based on the above tendencies, we could see a corrective upswing soon, but it seems that gold will slide much further in the coming weeks and that such an upswing would not be meaningful.

Consequently, we think that opening short positions in the precious metals sector is justified from the risk/reward point of view. The situation deteriorated in the past few weeks and gold wasn't even able to rally with a move lower in USD Index and the stock market.

Just in case today's breakdown is invalidated, we will place stop-loss levels close, as an invalidation would suggest another sizeable rally (before a bigger decline).

To summarize:

Trading – PR: Short position (half): gold, silver and mining stocks.

Long-term investments: A 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

• Gold: $1,320
• Silver: $21.50
• HUI Index: 235
• GDX ETF: $25.5

We might suggest increasing the size of the short position and/or suggest changes in the long-term investment part of the portfolio shortly (we would prefer to see where metals and miners close today before adjusting the big investment positions).

On an administrative note, this week's Premium Update will be posted 1 day ahead of regular schedule, on Thursday, Oct 3, and there will be no Market Alert on Friday, Oct 4, due to the annual meeting of the Sunshine Profits Team which will start on that day. If you have any comments, suggestions, requests regarding anything that we are doing, please let us know - that's the perfect time for it, as we will immediately discuss it.

Also, we have just posted our latest Market Overview report entitled "The Dollar System and Possible Tapering" in which we discuss when the tapering is likely to take place, what part of the Fed's minutes is crucial, the shocking link between Fed's assets and stock market prices. If you're interested, you can sign up here.

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 October, 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