The precious metals and mining stocks have been very strong in the last few days even despite a move higher in the USD Index and the lack of movement in the main stock indices yesterday.

The USD Index bottomed precisely at the cyclical turning point that we've featured in the last Premium Update, but it did not cause a decline in the value of the metals. When many signs point to a certain outcome and finally the market manages to move in a different direction, it truly shows strength of the underlying asset. Here, we had rising gold and silver prices despite the negative influence from the USD Index. Consequently, we've seen a relatively big rally from the non-USD perspective (from that perspective price of gold was trading sideways until the last few days).

The financial sector has been outperforming the general stock market in the past few days, which suggests that the recent move higher in the main stock indices was not a counter-trend rally, but a beginning of a bigger move up.

It's like the markets are telling us that the $600bn stimulus is in fact going to push stock prices higher (in nominal terms), but at the same time dollar doesn't need to move immediately lower. It might be caused by non-USD monetary authorities, who decide to devalue their currency just as the Fed is devaluing the greenback. Ultimately, the USD Index is just an average of the currency exchange rates between USD and other currencies, and if these currencies sink faster ("fiat currencies do not float; they sink at different rates"), we could have a rally in the USD Index. It seems that the market discounted the stimulus earlier, but is right now taking into account possible reactions of other monetary authorities.

In the previous Premium Update we wrote the following:

"Any confirmation, which clarifies the gray areas present today, will likely provide opportunities for speculative short or long positions depending on what is revealed."

The abovementioned action alone is such a confirmation, and we have also seen breakouts in gold and mining stocks above their trading channels. It seems that they will be verified soon and then the rally will continue. The volume action does not invalidate this case - it was not tiny in case of gold and mining stocks and - in case of silver - it was strong.

Both: XAU and HUI indices have moved decisively (!) above their key resistance levels (previous highs). While a quick re-test of these previous highs is quite probable, it seems that this time mining stocks will finally be able to hold this level as support. Quoting from the previous update:

The XAU gold-silver stock index has moved and closed yesterday above the highs seen in 2008. We have previously alluded to this as a key point and it could, in fact, lead to mining stocks outperforming gold once again. This could be the situation we are in today but we would prefer to see if the breakout can hold first. Ideally at least three consecutive closes above the resistance line are needed. Should that take place, a price decline to the previous high with low volume could make a bet on higher prices for mining stocks a good idea.

If you have a small short position here, we would keep it as there is still a small possibility of a huge decline. It's not likely anymore, but if it materialized anyway, it would most likely be huge.

The market appears really overheated right now, but once things settle down and XAU moves back to 210, it seems that we will have a great buying opportunity. At this point it seems that selling part (25% or so) of your long-term holdings (not counting bullion, please see our Key Principles section for details), and waiting for a pull-back (not a major correction) is a profitable thing to do. This would allow you to lock-in some of the gains on your long-term holdings, and at the same time it would ensure that you have significant amount of capital ready to take advantage of the pullback. Once it arrives (it could be just a matter of days, taking the recent volatility into account), we will most likely suggest opening a leveraged long position to magnify gains to be made on the following rally.

We will keep you updated and let you know if anything changes and we believe that additional action is required on your part.

Thank you.

Sincerely, Przemyslaw Radomski