gene arensberg discusses the recent market action in the precious metals:

Although it is not clear that the current pullback/correction for gold has run its course, given some of the signs we see in this week’s data, we are uncomfortable continuing to hold inverse gold ETFs, even as a hedge. We believe the potential for an upside explosion outweighs the potential of further downside in the very near term. We detail why just below.

We maintain our neutral bias for gold for now, safely on the sidelines with the majority of our short-term ammunition. Our bias remains cautiously bullish for silver because it remains strongly undervalued relative to gold, but we have yet to see much in the way of improvement in the indicators we rely on the most. We did add to our short-term silver positioning this past week, albeit with tight new-trade trading stops until either the market proves our new silver long positioning correct or it shows it to be premature.

As for mining shares, given our short-term caution for gold we must therefore also be cautious for the larger gold mining companies short term. However, we noted that many of the smaller, less liquid and more speculative miners and explorers in our universe of about 90 Canadian and U.S. based resource related companies showed remarkable relative strength over the past week. If this “little guy” strength continues we will view that as a bullish sign.

Despite a significant pullback in both gold and silver, as expected, we note positive money flow into gold ETFs and no appreciable negative money flow from silver ETFs. That suggests that investors are buying this dip in gold and it suggests that buying and selling pressure for silver ETFs was more or less equal. (Details below.)

In a startling development, as the U.S. dollar index blasted much higher this week, ICE commercials nearly doubled their net short positioning in the greenback. That could be suggesting that the dollar rally is at risk of a near-term top or reversal. (See more below).

Well-financed mining shares answered gold’s weakness, but have yet to signal a distressing over-sell such as we saw last fall. Smaller, less liquid and more speculative miners and explorers outperformed their larger cousins. (Both discussed below.)

We see little in the way of “improvement” from the positioning of the largest of the largest hedgers and short sellers of futures on the COMEX. For all the details, don’t miss the Gold and Silver COT sections below.

In short, we remain cautious for gold very short term. With our short-term caution firmly in mind we reiterate our longer-term view that the world will most likely continue down a path of fiat currency debasement, weakening confidence in all fiat currencies, coupled with incessant official meddling and interference. We see the setup as long-term very bullish for gold metal and extraordinarily bullish for silver looking well ahead.

Absent another global systemic financial scare, we see nothing which promises to reverse the current flight of wealth out of paper and into real money. With central banks becoming net buyers of gold we should view harsh dips for the metal as buying opportunities – once convinced the corrective reaction is done.