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TSX Venture Exchange and Gold

It was a disappointing week for the CDNX (Gold performed as expected but not the CDNX) which declined each day and shed 98 points or 4.1% to close at 2291, erasing all the gains of the previous week.  While the market closed below 2300 Friday for the first time since April 1, there is still strong technical support in the 2275 to 2290 area as we saw in late March.  The rising 100-day moving average (SMA) also provides support around 2270.   The Chaikin Money Flow (CMF) indicator is very close to a support level – the same with the Slow Stochastics which is near the March lows.  So the probabilities do not lean toward a breakdown.  The five down days follow eight consecutive daily advances for the CDNX.

The CDNX got as high as 2399.66 shortly after the opening bell Monday morning before going into a reversal that closely mirrored that of the TSX which fell nearly 3% for the week.  The sell-off seemed to have been sparked by a bearish short to medium term commodities call (three to six months) by Goldman Sachs (oil and copper in particular) which also cut its ratings on Canadian stocks.   Only time will tell if they are correct.  There will be a significant pullback at some point in this long-term and robust commodities bull market – the only question is when.  The CDNX, a very reliable leading indicator of the direction of commodity prices, is holding its own (it’s essentially flat for the year so far) and has shown great resilience.

Gold hit another new all-time high last week and closed Friday at $1,486 for a weekly gain of $11.   Silver is showing no signs of slowing down as it enjoyed another powerful week and a fresh 31-year high, climbing $2.12 an ounce to close at $43.05.  A new record high in Silver certainly seems achievable this year (its previous high came January 18, 1980, when it hit $49.45).

It seems quite likely that Gold will touch the magic $1,500 mark next week where it will probably meet some resistance and pause to catch its breath.  In fact, John’s first Fibonacci target is $1,493 as shown in his chart posted here a week ago.

Gold charged higher Thursday after a weaker than expected U.S. jobless claims number.  The yellow metal gained additional strength Friday after stronger than expected inflation data out of China combined with the announcement that China’s foreign exchange reserves rose above $3 trillion.

The U.S. consumer price index for March rose 0.5%, in line with February’s gain, while core CPI rose 0.1% (less than expectations) after gaining 0.2% the month before.  Fed officials will look at the core CPI number and argue that underlying inflation remains subdued.  However, the chart below which plots the consumer price index as well as import prices on a year-over-year basis clearly shows that inflation is on the upswing in the United States:

Import prices are highly influenced by oil prices which rose 31.3 percent but other areas are rising rapidly as well such as food and beverages, up 18.9 percent year over year and industrial supplies rising 23.5 percent.  Canadian import prices have risen 8.2% year-over-year given the weakness in the U.S. Dollar.

The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), 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, rising oil prices, inflation concerns…the list goes on.  It’s hard to imagine Gold not performing well in this environment.  The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.

For those pundits who mistakenly claim that Gold is in a “bubble”, its interesting to note that Gold ownership as a percentage of global financial assets is only 0.7% vs. 0.2% in 2002 at the beginning of the current bull cycle (a majority of that increase has been fueled by Gold’s sharp price appreciation).

As an asset class, Gold is still very much under-owned. And the “masses” still haven’t piled into Gold stocks.  We’re not even close to a bubble in Gold.

All eyes will be on the Fed later this month as Chairman Ben Bernanke holds an unprecedented press briefing following the April 26-27 FMOC meeting.  There is all sorts of speculation regarding the Fed’s quantitative easing program and if it will end as scheduled in June.  “QE” is like a drug, however, and Bernanke’s addiction to it in our view is not likely to suddenly end.  He doesn’t perceive inflation to be a major threat in the United States and there continue to be risks to American and global economic growth.