We normally send out Market Alerts when points made in our most recent Premium Commentary (Premium Update / Market Alert) are no longer up-to-date, and this has NOT been the case this time, however taking into account the recent market volatility and the fact that we have received several market-related questions from our Subscribers, we've decided to provide you with a mid-week follow-up regarding the current situation.

Let's begin with the fact that gold and especially gold stocks have rallied strongly - is the top in? In our view - not necessarily. The rally has been indeed sizable, but neither gold nor PM stocks have reached strong resistance levels. Conversely, gold has just moved above early April high on strong volume, and is now verifying this breakout.

We can state a similar thing about PM stocks - we don't see signs of the rally's exhaustion at this point. Additionally, the GDX ETF (proxy for PM stocks) it has moved slightly higher on strong volume on Tuesday, while the general stock market dived - this is a VERY bullish signal that suggests that this rally is not going to end today.

Moreover, the USD Index has moved up to its resistance level (and gold managed to rise nonetheless), and several techniques suggest that the general stock market - recently positively correlated with PMs - has become less overbought, and that is more likely that it was the case last Friday. Both factors are bullish for the PM sector.

Naturally, the rally might pause and consolidate for a few days, but at this point we don't see clear "top is in" signs and given the strength of the momentum it seems to be a good idea to hold to one's long positions.

Selling into strength is generally a good idea, but given the very weak sentiment (as mentioned in the latest Premium Update), strong volume, and lack of clear sell signals, we would prefer to wait for more bearish signs before exiting long positions here.

There's one more thing that I would like to comment on in this message and it is the recent performance (or more precisely the lack thereof) of silver. While it might appear discouraging and even be viewed as a divergence pointing to lower PM prices, please note that silver tends to lag gold during early stages of a rally, and it vastly outperforms during its final stage.

Taking this into account, silver's recent performance suggests that we are not yet near a major top. Please compare the November 2009 rally in gold and in silver - the former moved up steadily while the latter paused at the beginning of the rally (early Nov 2009) only to soar over $1.50 several days later. Additionally, silver's poor performance is in tune with its cyclical patterns - it's in the "close to the bottom" territory suggesting that we are to see some kind of local bottom before the next rally in the white metal begins.

Moreover, as we have stated many times in the past, the silver market is much smaller relative to the gold market, which means that the reliability of the signals coming from this market is limited. That doesn't make them totally useless, but if this "divergence" is not confirmed by other techniques we don't view it as strong enough to cancel other bullish points made above.

Summing up, while the targets for this rally are unclear at this point (we will get back to this topic in the following Premium Update), it doesn't seem that the rally is over yet. As always - we will send out another Market Alert if we change our mind about the current market situation before the next Premium Update is posted (the latter is regularly scheduled for Friday).

Thank you.

Sincerely,
Przemyslaw Radomski