CDNX and Gold
The incredible strength and resiliency of the CDNX was clearly on display Friday when markets across the board were under pressure – Toronto, New York, precious metals and commodities in general were all quite weak and finished the day down – and the CDNX bounced back from a 16-point loss early in the day to finish with a gain of 8 points. It closed the week at 2057, just 13 points shy of the November 9 high, for a strong weekly gain of 61 points. This market has already regained the 8% it lost during the brief mini-correction over 6 sessions between November 9 and 16.
Since the CDNX has proven to be such an accurate leading indicator of future activity in precious metals and even the broader markets, what does this tell us? It confirms what we’ve been saying all along – we’re in the midst of a bull run of historic proportions that is likely going to intensify very soon. January and February could be spectacular for the CDNX and a move to 3000 on the Index over the next 3 months cannot be ruled out. Don’t forget, the CDNX has a lot of catching up to do. This market was over 3,000 in 2007 when Gold was trading at half the levels it is now. The chart patterns we’re seeing with the CDNX are very similar to the Nasdaq run from the summer of 1999 to March of 2000 when that market doubled in value.
Over the past 4 months, since early August, the CDNX has been supported by a consistently rising 20-day SMA (simple moving average) and until that changes this market is going to continue to power higher. Investors who sold in panic when the CDNX briefly dropped below its still-rising 20-day SMA in mid-November made a serious mistake. The 2000 level is now new technical support for the CDNX though it’s quite possible we may not touch that area again. The “masses” have not yet picked up on what’s happening and they will be the ones giving this market the fresh buying and additional fuel it needs to challenge the 3000 level in early 2011.
Gold
Gold took a bit of a hit Friday but still finished ahead for the week (by $10) at $1,364, ending a 2-week slide. This was particularly encouraging given the fact the U.S. Dollar has climbed to its strongest level against the Euro in 2 months. The Gold market is so strong, it can very easily still rise in tandem with the U.S. Dollar. The European sovereign debt issue (who’s next to follow Ireland in seeking financial aid?) and renewed hostilities on the Korean peninsula caused some safe-haven buying to flow into the greenback this past week, and into Gold, but the “big picture” negative outlook has not changed for the U.S. Dollar. The Fed is also determined to maintain a low Dollar in an effort to rekindle inflation in the United States.
The Americans, of course, have a major debt problem of their own which surprisingly hasn’t fully sunk in with everyone yet. Sooner or later, a debt crisis will erupt in Washington. U.S. federal debt has doubled over the past 7 years to almost $14 trillion (this doesn’t include all the unfunded liabilities of the U.S. Government which means the situation is actually far worse). This year, combined spending on Social Security, Medicare and Medicaid are expected to make up 45% of primary federal spending compared with only 27% in 1975. If no action is taken, statistics show that U.S. federal debt held by the public could rise from 62% of GDP this year to 185% by 2035. With more than 70% of U.S. treasury obligations held by private investors scheduled to mature in the next 5 years, an erosion in investor confidence could lead to sharp increases in government and private borrowing costs. The new Congress won’t be focused on the debt issue at the moment though – greasing the wheels of the economy, including extending all the Bush tax cuts, and getting Americans back to work will be front and centre come January.
Frank Holmes, President and CEO of U.S. Global Investors, is one of the most intelligent commentators there is on the Gold market and commodities in general and we suggest BMR readers bookmark his site – www.usfunds.com. One of Holmes’ recent articles appeared on Kitco November 18 and we’d like to quickly summarize it.
The World Gold Council’s latest quarterly recap shows Gold demand is getting stronger despite rising Gold prices – the yellow metal rose 28% to record the highest average price for a quarter ever at $1,226.75. Gold demand jumped 12% on an annualized basis to 921.8 tonnes during the quarter. Jewelry demand, which increased 8% on a year-over-year basis, accounted for 57% of overall demand while investment demand rose 19% to account for 31% of total demand. Consumers and investors, especially in emerging markets such as China, India and Russia, are growing accustomed to higher Gold Prices. The chart below shows the consistently rising demand for Gold in China and India:
