CDNX and Gold
The CDNX began the week on a bearish note with an intra-day reversal Tuesday after the market reached its highest level (2438) since early July, 2008. After a 14-point advance early in the trading day Tuesday (Monday was a holiday), the CDNX then shed 77 points as North American markets had a hiccup over events in Libya. The CDNX closed down 60 points Tuesday at 2364, stabilized Wednesday, then plunged 38 more points Thursday. The sell-off Thursday brought the CDNX into a zone of very strong technical support with various indicators showing a quick turnaround was likely. Sure enough, the CDNX reversed course Friday and rose 47 points to close the week at 2376, a loss of 48 points. Technically, the outlook is very bullish entering the new week and the start of a new trading month on Tuesday as John outlined in his chart yesterday. The pullback this past week has unwound overbought conditions, laying the groundwork for a decisive move through resistance around 2450 that John previously pointed out. We’re very confident we’ll see his Fibonacci target of 2790 sometime during the second quarter of 2011. That’s a 17% move from current levels and in that kind of bullish environment, some individual stocks will double or triple in value or more.
Gold enjoyed a strong week and hit a high of $1,419 before settling Friday at $1,410. Silver raced above $34 to a new 30-year high last week, closing Friday at $33.38.
With high debt levels, low inflation and high unemployment in the United States, the Federal Reserve is going to be in no hurry to end its quantitative easing program and should keep short-term interest rates at historic lows well into 2012. The Commerce Department last week revised U.S. GDP growth in the fourth quarter to 2.8% from 3.2%. Economists were expecting a slight upward revision. The slower growth rate confirms the Fed’s concern that the pace of growth remains too slow to significantly lower a 9% unemployment rate.
Charles Evans, President of the Federal Reserve Bank of Chicago, stressed the need for continued “dovish” monetary policies. While Evans did not specifically refer to a third round of quantitative easing (QE3), he hinted at such a move by saying that “the message that comes out of what I think of as high-quality research on this subject is that policy ought to remain accommodative for really quite a while, even a while after conditions start to improve.”
The fundamental case for Gold remains so incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an extended period of negative real interest rates (inflation is greater than the nominal interest rate, even in China and India despite increasing rates there), 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 (with the volatile Middle East being the focus right now)…the list goes on. It’s hard to imagine Gold not performing well in this environment.
Technological uses for Gold are becoming more recognized. The World Gold Council announced updates on new commercial uses for Gold in automotive emissions control systems which began being used during the first quarter of this year. Other recent developments that could increase Gold demand include uses in catalysts and nanoparticles to clean contaminated water supplies, reduce mercury emissions and improve the efficiency of production of other common chemicals.
Generally, March is not a seasonally strong period for Gold but we’ll see if the yellow metal can buck the trend this year. Gold has been down three of the past four years in March while over the last decade, only 2004 and 2006 produced good months in March for the yellow metal.
Gold is hardly in a bubble and has much higher to go in our view over the long term. Despite the fact Gold surged to a new all-time high of around $1,430 last December, it’s up only 14% over the last six months since the Fed launched QE2. Oil is up 32% during that time while Silver is up a remarkable 69% which is why one of our favorite Silver stocks, Great Panther Silver (GPR, TSX), has performed so well. Silver has been doing some catching up with Gold recently as John’s 10-year monthly comparative chart below illustrates:
Happy investing in the week ahead!
