This Alert is more of an early reply to a question that we've received than anything else - we didn't change our bullish views on the precious metals sector. We get the feeling that many of you might get the same feeling as the author of the below question and that you would appreciate a reply.

"Relative to my previous feedback, days like today are a prime example of the sort of days when a little encouragement would come in handy. I think "frustrating", "depressing", or "annoying" all fall desperately short of adequately describing the emotional roller coaster the PM market is putting people through. For every dollar it goes up, it goes down two. I'm at a loss for words to explain how sick to my stomach days like today make me feel. I've watched silver go up drastically at least three times in the last several weeks. And not once has it happened that it wasn't immediately countered the very next day with a drop as large, or larger, than the rise the day before.

A little encouragement, or perhaps an explanation if there is one, would be appreciated. Why does it keep doing this?"

We think that there are three approaches to the "why" question in this case.

1. The market keeps consolidating precisely because there are still some investors who are in the market only because they haven't been scared enough to get out. They are not believers in the gold story and once they give up, there will be nobody left to sell. There are very few of them left because the sentiment is already very low and the consolidation has been in place for a long time. Actually, the volume in GLD on Monday was low, which suggests that this is a pause, not a beginning of a decline. Consequently, just because gold moved a bit lower and we don't have a clear rally yet, doesn't invalidate any of the bullish points made earlier.

2. The relatively small moves that we've seen in the past 2 days are rather random, and one should not put any weight on them as no support line has been broken in consequence. The move above the upper dashed line marked in the GLD chart in the latest Premium Update did not hold, but this resistance line was not significant enough for the invalidation of the breakout to be a bearish signal by itself. Again, Friday's and especially today's moves were not accompanied by significant volume. Huge volume was seen on March 13, and April 3 - days followed by bigger declines. This time it was not the case. Consequently, the situation is not bearish.

3. The decline in the precious metals could be attributed to the move higher in the USD Index. On the short-term USD chart in the latest Premium Update we wrote that "(…) USD Index is ready to move lower, but on the other hand a small move above this line (to the dashed line based on intra-day highs) would not be surprising either." Actually the dollar moved temporarily higher right to the above-mentioned dashed line and metals moved lower. The USD Index did not break out, so the situation did not change from positive to negative as far as implications for the precious metals are concerned. The fact is that the USD Index closed a bit higher than it did on April 4, and actually gold closed $30 higher today than it did on April 4. So, on average, gold managed to move higher despite the lack of decline in USD, which is a very bullish sign!

Therefore, no matter what the answer to the "why" question is, we still remain bullish on the precious metals sector.

We were asked to provide encouragement, but although the factors mentioned above support the bullish case, we would like to stress that when we re-examined all charts that we review on a regular basis (and a few extra ones) before starting to write this message, we did not aim to find encouraging facts.

We aimed to do the same thing that we do each day - to analyze each chart as if we didn't have any opinion about it yet. The plan was (and the same is the case each day) to then compare the outcome of this analysis to our views on the market from the prior day (or hour or minute, depending on when we reviewed them previously) and to report to you if anything changed (that's why we end each alert or update with a promise that we will let you know if anything changes and that's why you can rest assured that if you don't see a new message from us, you are up-to-date with our views on the market). Consequently, what you read so far in this message and what you will read below was not "artificially designed" to be encouraging - the situation is simply that bullish in our view.

Here are some other facts (!) that we found: Gold:yen ratio is once again flashing a buy signal,

- Alcoa rallied for two days at the beginning of 2012 and then consolidated for 2 days before rallying further. This time we've also seen two days of lower prices after a very similar two-day rally,

- It was quite common for the HUI Index to bottom at the 38.2% Fibonacci retracement level in a double-bottom manner.

And here are our opinions:

- As Alcoa's rally (and recent bottom) has not been invalidated - and actually the situation develops as it did previously - and the link between AA and gold is still in place, we continue to have bullish implications for gold,

- HUI's move lower is within historical norms (long-term one's, but still), so again, the recent two-day weakness is not really concerning,

- Silver's short-term performance is often misleading if gold suggests something else, so we don't put too much weight on silver's decline on Friday.

However, the most important thing is right now is what didn't change in the past days - previous buy signals coming from our in-house developed indicators, juniors-to-stocks ratio and it's major bottom signal from early April, extremely oversold reading in the Gold Miners Bullish Percent Index, gold-to-bonds ratio, self-similar pattern in gold, and - most of all - the investor sentiment didn't improve at all. 

In addition to the above, please take a few minutes to re-read what we wrote on April 4, as the whole message remains up-to-date:

http://www.sunshineprofits.com/premium_commentary/04-apr-1

To sum up, the fundamental and technical pictures for precious metals are very favorable and the sentiment is very negative. This is a very bullish and powerful combination. 

We strongly suggest not (!) betting on gold moving lower once again (we do not advocate such bets for other metals or miners as well). We believe that one should remain on the long side of the precious metals market because of multiple bullish factors mentioned in this Alert and in the one posted/sent on April 4. If one doesn't have an open long position in the precious metals sector, we suggest opening it.

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.