The situation on the precious metals market has become quite absurd yesterday when silver and mining stocks declined and gold rallied. It seems that the situation in the Euro and USD Indices could be at least partly responsible for this action. The assumption here is that gold is being viewed as a hedge against financial turmoil more than silver or mining stocks.

Euro moved much lower yesterday (it moved to May low - below Nov 2010 high and the long-term support is even lower) and at the same time USD moved higher, but by not as much as Euro had fallen. With European currency declining to a big extent we've seen an increase in demand from the European side which was not offset by sales from those who exchanged gold for rising USD. With declining euro people jumped both into gold and USD. It seems that some investors simply chose to hedge with gold than with dollars.

Generally, this is a phenomenon that we should be seeing on a long-term basis, not during daily downswings, as this is a fundamental factor (people losing faith in fiat currencies). So, there is likely another explanation - and in this case we believe it could be attributed to the fact that people simply did not believe in dollar's strength yesterday when it moved slightly above the declining trend channel. Actually, we have written about that ourselves in the last update - that we will wait for the breakout to be confirmed before we become bullish on the buck once again. Consequently, we had demand for gold given the declining euro and actually lack of the opposite action from investors considering purchasing USD because the rally in the USD Index was not viewed as convincing.

As mentioned above, this situation affected gold as it's being viewed as a hedge against financial turmoil more than silver or mining stocks.

Meanwhile, the stock market stopped at the rising resistance line and declined after reaching it. At this point this could be either a small breather within the rally or the third top and a part of a head-and-shoulders pattern. Time will tell, but taking a look at the financial sector suggests that bigger declines are coming. In fact, financials moved to their late-June lows yesterday as the general stock market declined.

Silver and mining stocks were the first of the precious metals sector to react to this move lower in the main stock indices, and if the decline continues, gold is likely to follow.

Consequently, we continue to see lower prices of precious metals this summer and we'll let you know as soon as anything makes us change our views.

Thank you for using the Premium Service.

Sincerely,
Przemyslaw Radomski