The long-term interest rates are now very close to the level that they reached in 2008. Back then, metals were already rising after a major bottom and stocks were yet to bottom. The implications are bullish for metals and bearish for stocks in the short term and bullish for the long term. Rates could move even lower, however such a move would likely be quite quick and it would not invalidate the above. In 2008 gold bottomed before the rates and this could be the case also this time.

The general stock market moved decisively below the long-term support line and there were confirmations of breakdown seen in the Dow Jones Transportation Average and the financial sector. The implication for the precious metals market is "theoretically" bearish. "Theoretically", because on Friday, gold managed to rally strongly despite stocks' weakness. At this time, though, this is still just a one-time event and the correlation for the past 30 days has been quite positive and amounts to 0.6. The closest support level for the general stock market is close to 1225 and if it doesn't hold, then we would likely see stocks move to their 2011 low. A decline to this level should be enough for the Fed to justify another round of QE.

So, we have a situation where the recent history tells us that gold is likely to follow stocks lower, but at the same time we have long-term rates that say that the turnaround in gold is likely to be followed by a turnaround in the stock market and that the moves in the opposite directions are quite likely in the short term (that is until stocks form a bottom).

The overall implications of the above 3 paragraphs are bullish for gold in the medium term.

A breakout in the dow:gold ratio was invalidated on Friday and therefore this ratio is now more bullish than not for gold.

While gold moved visibly above the short-term declining resistance line, silver didn't. In fact, SLV ETF is still below the 28 level (red horizontal line on the SLV chart in the last week's Premium Update), the upper border of the declining trend channel, and the 20-day moving average, which has been stopping small rallies in silver since March. Since the trend remains down, we should expect lower prices for the white metal.

Moreover, the silver:gold ratio is well below the rising support line, and this is definitely not a good sign for the precious metals. The direct implication is that silver is now likely to underperform gold for some time. We saw an example of that on Friday. In fact, this is something that we saw in 2008 when the decline paused. Gold moved sharply higher and the analogous move in silver was much less visible.

The head-and-shoulders formation in the TSX Venture index is still in place and it implies a big move lower in the precious metals sector - especially in the mining stocks.

In Friday's Market Alert we wrote that the consolidation in the USD Index might be almost over as the support level is very close - and the closest support level - 82.50 was indeed reached today. Gold declined instead of moving to new highs.

Additionally, please keep in mind that we are now entering the part of the year that used to be unfavorable for precious metals in the past years. Yes, there were exceptions, but the tendency remains. We have discussed the likely impact of the true seasonal trends over a year ago and current situation is actually quite similar in this dimension - http://sunshineprofits.com/premium_commentary/20-may (please take a look at the True Seasonal chart for HUI). Please note what happened after that update was published - prices actually followed the trend, which makes this seasonal tendency a bit stronger this year. Early June is where local tops often emerged in the precious metals sector.

Summing up, three major factors improved for gold last week: the breakdown below the long-term support line was invalidated by Friday's strong rally, the dow:gold ratio invalidated its breakout, and long-term interest rates moved sharply lower and are now very close to their 2008 low. At the same time we have breakdowns in silver:gold ratio, crude oil prices, and TSX Venture Index and a bearish True Seasonal pattern.

Consequently, we believe that the probability of a major decline in the precious metals sector is now lower - no longer 70%, but 55% or so. Moreover, it seems that if the decline materializes, silver and miners will be affected more than gold (because of the situation in: silver:gold ratio and TSX Venture Index). Therefore, we suggest getting back in the market with the long-term part of one's capital that is related to gold and staying out with the silver, platinum and mining stocks parts.

No short-term speculative positions are suggested at this time.

Thank you.