On Friday, the precious metals sector declined once again and the decline materialized on relatively big volume. The gold-stocks-to-gold ratio dropped sharply and it looks like it's about to break below its previous 2013 lows shortly. The outlook remains bearish.

The Euro Index plunged sharply last week (invalidating the breakout above the previous 2013 high) and the magnitude of the decline is by itself a bearish indication, as these types of moves - when seen after substantial rallies - usually meant that the worst was still ahead. Let's be clear here - gold can and has rallied even when the euro declined substantially. That was the case in 2010, for example. Additionally, please note that the Euro Index is now more or less where it was about 5 years ago and gold is now about $500 higher. If it was the only bearish factor for the precious metals market and there was a good possibility of a serious decline in the Euro Index, we would have probably put less attention to it. However, now, gold is in a medium-term downtrend and it doesn't take much to ignite another substantial wave down - such a decline in the Euro Index (and a rally in the USD Index) is a possible spark.

The USD Index burst through the declining resistance line based on the July and September highs. We just saw a short-term breakout and an invalidation of the medium-term breakdown. Of course, both are bullish factors.

On a side note, silver plunged in perfect tune with its cyclical turning point, several days after the USD Index started to rally based on it's own turning point. This technique has proved very useful in the recent days.

The key question now is whether one should increase the size of the speculative short position or sell/hedge the long investment position in the precious metals sector (as a reminder, we had suggested moving back only with half of the long-term investment capital). After considering many pros and cons, we think that it's best to wait at least 2 more days before making such suggestions. The recent moves materialized very quickly (thus, some kind of breather is quite likely) and the above-mentioned breakout in the USD Index is not confirmed just yet. We prefer to see that these price swings (upswing in the USD Index and downswing across the precious metals sector) were not a coincidence, and a verification of the breakout in the USD Index along with a lack of strength in gold, silver and mining stocks can make the situation even more bearish, which would justify increasing the size of the short position and/or selling/hedging long-term precious metals investments. For now, we think that a small speculative short position is justified, but a big one - not necessarily.

To summarize:

Trading – PR: Half position: short position in 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

Stop-loss orders for the above-mentioned speculative short positions:

• Gold: $1,392
• Silver: $23.90
• HUI Index: 268
• GDX ETF: $28.80

As always, we'll keep you - our subscribers - 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) 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