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TSX Venture Exchange and Gold

Note:  Canadian markets are closed Monday (holiday), so BMR Morning Musings returns Tuesday.

It was a rough week for the broader equity markets – the worst weekly drop for the S&P 500 (2.7%) in two years – and even Gold got knocked down $14 an ounce for the week despite Friday’s surge while Crude Oil (WTIC) was slammed 4.1% – but the Venture found support Thursday and Friday at the 1000 level and closed the week down just 16 points or 1.6% at 1001 (the 38.2% Fib. retracement on the 6-month daily chart you’ll see below).

For the past 15 sessions the Venture has remained within a support band between 1000 and 1020.  As we’ve stated previously, the worst-case scenario for the Venture is a re-test of the 980 area which is the rising 200-day moving average (SMA) and a massive wall of support.  The upside potential in this market as the quarter progresses substantially outweighs the downside risk, in our view.  As long as patient investors remain focused on high quality situations, and see these minor healthy pullbacks for what they are, then wise (not silly) decisions are made during periods of increased volatility (up or down) when a lot of investors make the mistake of becoming slaves to their emotions.

Understand the primary trend, key support and resistance areas, and stay focused on the “Big Picture” which remains very positive for the Venture. Below is the updated 5-year weekly chart with a Gold comparative.  Note the string of higher lows the Venture has made since bottoming at 859 in June of last year.

RSI(14) on this 5-year weekly chart is once again testing the uptrend line (very healthy) which should continue to hold as support after serving as resistance since mid-2011 (major trend change).  A modestly overbought condition in the RSI that emerged in March when the Index hit 1050 has gradually unwound to this new support around 50%.

The Q2 decline that took the Venture to superb support at 968 May 20 came on light volume, and accumulation (CMF indicator) remains steady and strong – the most extended period of healthy accumulation we’ve seen, actually, in a few years.  This is a very bullish dynamic, and includes a recent +DI/-DI crossover.  Those who gave up on this market during the 8% retreat from 1050 made a profound miscalculation.  Astute investors have a great chance to cash in big over the next two to three months in particular before the possibility of a more substantial correction during Q4.

Venture 6-Month Daily Chart

This shorter-term Venture chart shows how a minor correction started in early July when RSI(14) was marginally overbought and then broke below an uptrend line in place since May.  Buy pressure began to decrease and a bearish -DI+DI crossover occurred.  In this kind of scenario, it’s natural for the market to retreat to strong support levels and gather fresh energy for the next wave higher.  Either the 1000 level will hold or the exceptionally solid floor directly beneath it around 980 will keep the primary bullish trend intact.

The Seeds Have Been Planted (And Continue To Be Planted) For The Next Big Run In Gold Stocks

There’s no better cure for low prices than low prices.  The great benefit of the collapse in Gold prices in 2013 is that it forced producers (at least most of them) to start to become much more lean in terms of their cost structures. Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their their overall operations.  Exploration budgets among both producers and juniors have also been cut sharply.  In addition, government policies across much of the globe are making it more difficult (sometimes impossible) for mining companies to carry out exploration or put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe).   Ultimately, all of  these factors are going to create a supply problem – think about it, where are the next major Gold deposits going to come from? On top of that, grades have fallen significantly just over the past decade.

Gold

Gold was smacked down into the high $1,270’s last week, thanks to a slew of economic data including more deflationary signs in the euro zone, but a rally Friday on a weaker-than-expected U.S. jobs report cut the weekly loss to $14 an ounce as bullion finished at $1,294.  Much less economic data will be coming out next week, so bullion may focus more on geopolitical events.  Fib. support ranges from $1,270 to $1,289 while chart resistance bands exist between $1,306 and $1,310, and between $1,320 and $1,330.  A month or so of buy pressure has turned into sell pressure.

A strengthening U.S. Dollar Index has been hurting Gold recently but the Dollar Index at 81.31 is now within a band of Fib. resistance between 81.11 and 82.40.

Silver fell 45 cents last week to close at $20.30 (Fib. support ranges from $19.50 to $20.33).  Copper lost 2 pennies to $3.21.  Crude Oil was off sharply for the week, plunging $4.21 a barrel as it hit a 6-month low.  The U.S. Dollar Index enjoyed another strong week, gaining one-quarter of a point to 81.31.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, the long-term bull market in Gold has been driven by both the Fear Trade and the Love Trade.  The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, has had a huge impact on bullion and will continue to support prices.   Despite Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact based on the following factors:

• Growing geopolitical tensions, fueled in part by a highly dangerous and expansionist Russia under Vladimir Putin, have put world security in the most precarious state since World War II;
• Weak leadership in the United States and Europe is emboldening enemies of the West;
• Currency instability and an overall lack of confidence in fiat currencies;
• Historically low interest rates, a Fed balance sheet at more than $4 trillion (still expanding), and money supply growth around the globe;
• Signs of increasing inflation;
• Continued strong accumulation of Gold by China which intends to back up its currency with bullion;
• Massive government debt from the United States to Europe;
• Continued net buying of Gold by central banks around the world;
• Flat mine supply and a sharp reduction in exploration and the number of major new discoveries

Deflationary concerns around the globe and the prospect of Fed tapering had a lot to do with Gold’s plunge during the spring of 2013 below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew “momentum traders” away from bullion.  The June 2013 low of $1,179 was the bottom for Gold.  Extreme levels of bearishness emerged in the metal last year.  With the long-term bull market remaining intact, we expect new all-time highs in Gold as the decade progresses.  Inflationary pressures should eventually kick in around the globe after years of ultra-loose monetary policy and the reluctance of central banks to increase interest rates.