The precious metals sector declined yesterday and the decline was most visible for mining stocks. In our previous alerts and updates we emphasized that the recent strength in mining stocks was not something really meaningful, because there had been multiple previous cases when such short-lived strength didn't mean much and was a bearish short-term indication, if anything. The GDX:GLD ratio moved quite close to its June lows yesterday and at the same time visibly broke below the support line based on the January and June highs. The decline seems to continue in terms of miners underperformance relative to gold.

The mining stocks also moved strongly below their medium- and short-term support lines (based on the January and March highs and the March and June highs, respectively), which is another bearish indication.

It's worth pointing out that the move materialized on relatively large volume and that miners declined consequently right until the end of the session (their intraday low equals the closing price), which is a bearish very-short-term sign.

Gold moved to its declining support line (based on the April and June highs) which remains in tune with what we had seen at the beginning of the previous decline, on June 11. At that time gold bounced slightly and then plunged. Will we see this type of action once again or will gold decline right away (these seem to be the most likely alternatives)? It depends on the USD Index.

The best part of yesterday's decline was that it materialized without a move up in the USD Index. The latter actually declined and PMs still managed to decline - with miners breaking below important support levels. This is yet another sign of great short-term weakness and vulnerability in the precious metals market. Don't get us wrong - we think the fundamentals remain in place and metals and miners will move much higher and above their 2011 highs, but our bet is that in the next few weeks they will move sharply lower.

If the USD Index consolidates or declines some more, it seems that we will see metals bounce a little, similarly to what we saw in early June. If the USD Index rallies shortly, we may see a big drop in the prices of metals without another pullback.

Either way, the outlook for the precious metals market remains bearish and short positions in it remain justified. If we hadn't already suggested doubling the size of the short position (on July 26, when gold was $50 higher than it is today), we would suggest it today based on the above bearish signals. Since the short position is already significant, we simply suggest keeping it.

To summarize:

Long-term capital: Half position in gold, silver, platinum and mining stocks. As far as long-term mining stock selection is concerned, we suggest using our tools before making purchases: the Golden StockPicker and the Silver StockPicker

Trading capital: Short positions in gold, silver and mining stocks.

We are not ruling out the case in which we're going to see a breakout today (which is not likely, even though another small move higher could be seen), and in this case the short position would have to be closed. Consequently, we suggest placing the following stop-loss orders:

• Stop loss for gold's speculative short position: $1,356
• Stop loss for silver's speculative short position: $20.90
• Stop loss for the HUI Index's speculative short position (theoretically, as you can't short the index by itself): 273
• Stop loss for GDX ETF's speculative short position: $29.40

We suggest placing buy orders for the speculative long positions in gold at $1,105 and for silver at $15.20 (and closing the short position at that time - if these levels are reached). The analogous level for the HUI Index is 155. If gold moves to $1,105 but other market don't move to their targets - we suggest closing short positions in gold, silver and mining stocks and going long these sectors anyway. If silver or the HUI reach the target but gold doesn't, we suggest closing all above-mentioned short positions, but going long only the market that has reached its target. In this case you will likely hear from us shortly, but you know what our take is even before that happens.

Entry levels and stop losses for the above rather-soon-to-be-opened long positions:

• Gold: $1,105 (stop-loss: $970)
• Silver: $15.20 (stop-loss: $14.20)
• $HUI: 155 (stop-loss: 137)

These levels are slightly above the price targets to maximize the odds of entering the trade (if everyone thinks that gold will move to $1090 they will buy before it reaches this level and ultimately gold may not drop as low at all).

As always, we'll keep you updated should our views on the market change. We will continue to send out Market Alerts on a daily basis (except when Premium Updates are posted) at least until the end of August, 2013 and we will send additional Market Alerts whenever appropriate.

As a reminder, Market Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent we will send you an additional small alert before posting the main one.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA