TSX Venture Exchange and Gold
The Venture finished the week on a positive note, climbing 6 points Friday while the broader markets and Gold all declined. For the week, the Index gave up just 2 points to finish at 690.
Interestingly, despite the dramatic late 2014 sell-off and the challenges the junior resource market has faced since, the Venture has been able to hold critical support at the 680 level on a monthly basis. This support, as you can see in the chart below, is now stronger than ever.
A key market to watch, of course, is the U.S. Dollar Index which rallied during the last half of May – certainly not unexpected after it sold down to temporary support. The Dollar Index faces considerable resistance in the upper 90’s given the double top pattern that formed in March and April, in addition to some other bearish indicators – very positive for the Venture as long as that trend continues.
Some strength in the CRB Index over the next few months seems likely, as John has shown in recent charts, and Copper (a reliable leading indicator) is looking very interesting as well from a broad perspective, despite its recent pullback. Crude Oil probably found its bottom in the low $40’s while resilience in Gold producers suggests a 3-year correction in the yellow metal may indeed have ended last November. So the Venture’s upside potential as this quarter progresses, and looking ahead to Q3, definitely appears to exceed its downside risk, a very different scenario than the one that existed last September when the Index simply fell apart technically, driven largely by the collapse in Crude prices. Yes, the resistance just above 700 is frustrating but the Venture has also been building a strong base this year. Non-resource issues of course have performed the best.
6-Month Daily Venture Chart
What’s encouraging about this chart is that sell pressure, dominant for the month of May, has been replaced by increasing buy pressure, and this pattern is typically a prelude to gains in the Index. In addition, a bullish engulfing reversal candle pattern has formed with the Index nearing touching strong support at the uptrend line from last December’s all-time low. As we pointed out last weekend, the Venture’s current technical posture is such that the chances of a near-term breakout above 707 are better now than they were in mid-April. Exact timing of a breakout, however, is the issue, and what would the catalyst be?
U.S. Dollar Index Updated Chart
The bearish double top pattern that formed in the U.S. Dollar Index during March-April is supportive of the Venture which typically moves in the opposite direction of the greenback. Notice how the recent Dollar Index rally met strong resistance, as expected, at the uptrend trend where it broke down from in late April.
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 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 eventually create a supply problem and therefore great opportunities in Gold and quality Gold stocks. 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
Despite a softer U.S. dollar, Gold declined for the 3rd straight week, falling $16 an ounce to $1,172. On the 20-year monthly chart, as we showed last Monday, bullion finished May at its uptrend support line going back to the beginning of the bull market in 2001.
On the 2.5-year weekly chart, which has also proven to be a very reliable guide, Gold appears destined to test the $1,150 support. Notice that the right hand of the downsloping flag forms a bearish descending triangle with the base at $1,150. Thus, the $1,150 area is critical. If $1,150 fails, the first line of support is at the bottom of the flag.
Encouragingly, RSI(14) has continued to climb a gently sloping uptrend since last fall and is very close to support.
Historically, June is one of Gold’s most challenging months of the year – but this is also followed by the strongest 3-month period which is July-August-September.
Silver fell 52 cents last week to close at $16.65. Copper lost another nickel to $2.69. Crude Oil dropped $1.42 a barrel to slightly to $58.88 while the U.S. Dollar Index slipped more than half a point to 96.35.
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 3 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 the ISIS and al Qaeda, and 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/highly accommodating central banks around the world;
- 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 – a “day of reckoning” will come;
- Continued net buying of Gold by central banks around the world;
- Mine closings, a sharp reduction in exploration and a lack of major new discoveries – these factors should contribute to a noticeable tightening of supply over the next couple of years.
