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TSX Venture Exchange and Gold

Friday was a potential game-changer in the markets as an EU summit finally produced something concrete, a positive surprise relative to low expectations.  The agreement to allow the euro zone’s rescue funds to recapitalize Spain’s enfeebled banks directly and to buy Italian sovereign bonds sparked the biggest daily rise in European stocks, Italian and Spanish bond prices and the euro/dollar exchange rate this year.  Commodities surged as well with Gold jumping nearly $50 an ounce and crude oil climbing over 9%.

A key element of the deal was the introduction of a new system of European banking supervision via the European Central Bank, a first step towards a full banking union. The leaders also agreed on a 120 billion euro package of growth promotion measures and the start of negotiations to closer fiscal and economic co-operation.

With the ECB expected to lower interest rates next Thursday, and central banks across the globe sticking to accommodative monetary policies and ready to put the pedal to the metal if necessary, the “risk-on” trade could come to life at a time when many are expecting the summer doldrums.

Over the past decade, the Venture Exchange has enjoyed five “good” summers (July 1 through September 30) and five poor ones including last year when July was actually decent before the market started to unwravel in August.  So to expect the summer doldrums this year- well, you have about a 50% chance of being correct, perhaps less given the events Friday.

After a nasty 4-month correction that has has wiped nearly 30% off the value of the Venture, a strong third quarter could be in the cards.

The Venture found solid support just above 1150 last week and climbed 27 points Friday to close at 1191.  That was still a 15-point loss for the week but the technical picture has improved considerably. What was particularly encouraging Friday was the powerful finish.  The market gapped up in the morning, erased some of those gains, and then rallied toward the end of the day to close above the opening levels.  Volume picked up slightly.  Higher volume and broader participation are keys to driving the Venture back above 1200 and, importantly, through the downtrend line shown in John’s chart below.

Friday’s big success story was Barkerville Gold Mines (BGM, TSX-V) which surged 50% on CDNX volume of over 7 million shares after the company announced a robust NI-43-101 indicated resource estimate for its Cow Mountain Gold quartz open-pit model, in addition to impressive geological potential numbers over a 4-mile trend over its B.C. Cariboo properties.  This, plus the fact that New Gold (NGD, TSX) on Friday announced the start of production at its New Afton Mine near Kamloops,  is good news for B.C. plays in general.

Gold

Gold responded in very bullish fashion to the news out out of the EU summit and rocketed $47 higher to close Friday at $1,599 for a weekly gain of $32 an ounce.  Silver, which came within a whisker of a severe breakdown Thursday, gained $1.17 an ounce Friday to $27.49.  It’s important to note that the commercial short position in Silver is at a RECORD LOW – this is extremely bullish.

Sales of Silver coins in India are reported to be soaring in response to Gold prices hitting record highs in the local currency (the rupee has fallen 21% vs. the U.S. Dollar over the past year).

A close higher than $1,604 for Gold would put it above its 10, 20 and 50-day moving averages (SMA’s). The big challenge for Gold, however, will be to make a decisive move through some heavy resistance between approximately $1,650 and $1,700.

Copper exploded Friday, closing at $3.52, while Crude Oil enjoyed a spectacular day as it gained over 9% to close $7.27 higher at $84.96.  The U.S. Dollar Index fell sharply Friday to finish the week at 81.59.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being 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, is having a huge impact on Gold.

The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, governments and world leaders in general, an environment of historically low interest rates and negative real interest rates that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), money supply growth, massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on.  Massive central bank intervention appears increasingly likely to prevent a breakup of the euro zone and to kick-start the global economy.  It’s hard to imagine Gold not performing well in this environment.