Much happened today, even though the session has just begun. Let's begin with the long term and with the USD Index, which is currently a major factor for precious metals investors.

The long-term correlation between gold and USD is negative and significant, and short-term moves (like today's rally) will not change that soon. The medium-term correlation is also negative. Since the USD is above 82.5 which marks the long-term declining support line, it is likely to rally in the following weeks - and gold (also other metals and mining stocks) is still likely to fall.

Gold rallied today (and the speculative short positions with $1,585 stop loss were closed) - however, since the USD Index is still above 82.5 and the Euro Index is below the "neck" level of the bearish head-and-shoulder formation, gold's rally should be viewed as temporary. If the current situation is similar to the 2008 one, then what we are seeing fits the September 2008 rally (that was ultimately followed by even bigger decline, especially in case of silver and miners). The question is if the rally will be similarly big - if it is, then it may make sense to bet on it.

The Sep 2008 rally was accompanied by a significant correction in the USD Index and both moves ended relatively close to each other. The question now is if the correction in the USD is over or at least close to being over. The support levels are presently at 82.5 and 81.8. This is not much lower than where the index is right now. However, gold reacts extremely positively to any bearish sign in the USD Index, so gold's reply to the small decline in the USD Index, could be another big rally. "Extreme" means rather unsustainable. So, the question becomes if gold's overreaction toward a small move in the USD Index is over or not. The situation is difficult and our goal today was to find a clue that would allow us to distinct between a rally in progress and a counter-trend move of little meaning.

After re-examining the Sep 2008 pattern we found that the most of the rally took place after gold broke above a short-term resistance line (Sep 17th, 2008 and the support line was based on July 2008 and August 2008 highs). In this case the declining line is created by late-February 2012 and late-April 2008 highs. Gold touched this line today, but it's no longer above it at the moment of writing this message.

At this point gold is no longer below the long-term resistance line that we emphasized in previous weeks (which makes the situation more bullish), but the fact that USD Index is above 82.5 is similarly significant (which makes the situation more bearish). All in all, not that much changed in the medium-term picture for the precious metals.

Consequently, if you see gold above $1,630 before markets close today, we suggest opening a speculative long position. Otherwise, we suggest remaining out of the market with one's speculative capital and a part of one's long-term investments. We will examine the situation once again over the weekend and will send another alert / post and extra update if the situation requires it.

Thank you.