Gold USD Index rallied yesterday and gold didn't decline. In fact it moved slightly higher. Gold is also rallying today and so do - to a smaller extent - silver and mining stocks.

We have also seen several signals from our own indicators recently - the SP Gold Stock Bottom Indicator and the SP Gold Stock Extreme Indicators.

All of the above looks bullish for gold in the short term. Since we have previously suggested being partly out of the precious metals market and also betting on short-term decline in the mining stocks, the question - in light of the above - is if anything changed.

In short - we didn't change our mind - we still believe that being partly out of the precious metals market with one's long-term capital and using a part of the speculative one to bet on lower mining stocks' prices are good ideas.

The reason for the former (medium-term case) is that the main reason for us to be skeptical about gold's rally is still in place - USD has broken above a major resistance line and right now is verifying the breakout above the late-May high. Is gold really showing strength relative to the dollar? In the immediate-term - yes, but not in the medium term. At the moment USD Index is more or less where it was at the beginning of June and gold is currently lower than where it was at that time. Silver is well below its June high and mining stocks don't even compare - today's rally is barely visible when compared to the size of the June-July decline.

Other big-picture factors are in place as well: TSX Venture index (proxy for juniors) declined this week, and the silver:gold ratio didn't rally so far.

So, while we're seeing short-term (!) strength in gold (!), it doesn't really improve the medium-term picture. We didn't decide to limit the long-term investment exposure based on short-term factors, and they should not be overly important now as well.

Moving on to the short-term picture, if we had a short position in gold, we might close it today, but since we were suggesting opening it in mining stocks, we're not making changes. Even if we're going to see another move higher in gold (like at the beginning of the month), it will likely not translate into much higher mining stock prices. Miners have yet to show strength - so far we see continuation of weakness. Plus, we have a very bearish pattern in the TSX Venture index which "helps" to keep rallies in the mining stocks in check. Finally, as the USD Index continues its rally, miners will likely be affected to a bigger extent than gold (the short-term correlation between USD and miners is currently more negative than the one between USD and gold).

The rally that our indicators have suggested might be what we are seeing today - and the rally in the mining stocks is quite disappointing when one compares it to the one seen in gold - miners are where they were on July 13th, and gold is well above this level.

Actually, a temporary strength in silver and temporary weakness in the USD Index could have negative consequences, as both: silver and USD are approaching their turning points. If we see a small rally in silver and a small decline in USD, the turning points will become a bearish factor for the precious metals sector. We previously saw turning points in silver at the beginning of May and in Mid-June. In both cases they were followed by significant declines. Based on the cyclical turning point, we can expect declines in metals to continue at the beginning of August.

The bottom line is that we may see some temporary strength in gold in the following days. The emphasis is on both: temporary and gold. The bearish medium-term factors are still in place and therefore we are not changing our medium-term outlook. The bearish short-term factors for the mining stocks seem to be more important than the bullish one (current rally in gold). It still seems that miners are in the position where positive factors are accompanied by small rallies and negative factors generate big declines. And two key factors suggesting lower prices are still in place: breakout in the USD Index and confirmed head-and-shoulders pattern in TSX Venture Index.

Summing up, we didn't change our mind - we still believe that being partly out of the precious metals market with one's long-term capital and using a part of the speculative one to bet on lower mining stocks' prices are good ideas.

As always, we'll keep you updated should our views on the market change - even if it means sending another message in several minutes. 

Thank you.