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CDNX and Gold

The CDNX declined for the third straight week, despite record highs in both Gold and Silver, losing 30 points to close at 2252.  For the month of April the Index was off 44 points or 1.9% after a 4% decline in March.  Despite some of the volatility we’ve seen in the Venture Exchange so far this year, the Index’s monthly closings have stayed within a fairly narrow range between 2252 and 2392.  There is very strong technical support for this market at 2200 and major resistance between 2400 and 2465.

The CDNX has declined in 10 of the last 14 trading sessions, losing 4% during that period, and there is now a noticeable and growing divergence between the CDNX and the price of Gold.  This is a disturbing trend that we’re watching closely and trying to evaluate for its significance.  The CDNX greatly outperformed Gold throughout 2009 and 2010 and led the yellow metal higher.  Now we’re seeing Gold outperform (it’s up 10% so far this year with the CDNX down 1.5%).  Gold is also outperforming the producers as the TSX Gold Index is down slightly for the year (2.9%).  Historically, this kind of divergence has warned of trouble down the road for either Gold or the stock market in general.  Having said that, the CDNX clearly remains in a long-term bull market with rising 100, 200 and 300-day moving averages.  The bulls and bears are at a standoff as far as the near-term is concerned as John shows in the chart below.

Gold rocketed higher Friday, climbing $30 an ounce to $1,565.  It was up $57 for the week thanks in large part to Wednesday’s “Bernanke Boost” as the Fed chairman made it clear that the end of QE2 does not mean an end to accommodative monetary policies in the United States.  Inflation is transitory in the eyes of the Fed which will continue to provide support to the U.S. economy until growth appears sustainable and the employment picture has improved.

While the Fed may not buy more bonds after June, there is some speculation that it may sell a portion of the assets it bought at a loss and then roll the proceeds into the long end of the Treasury curve to try to bring down long-term interest rates.

Bernanke said nothing Wednesday to come to the defence of the struggling greenback which hit its lowest level since July, 2008, and Gold bugs are clearly of the view that the Fed has fallen behind the curve with regard to inflation.

From a technical perspective, Gold and Silver are both overbought at the moment (which doesn’t mean they can’t become more overbought) while the U.S. Dollar Index is heavily oversold.  In fact, public sentiment toward the Dollar is at extreme record low levels.  So the near-term likelihood of a bounce in the greenback and a pause for Gold and Silver has increased substantially in our view which is probably why last week’s surge was not met with great enthusiasm from investors in Gold and Silver stocks.

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.

Sales of Gold by signatories to the third Central Bank Gold Agreement (CBGA3) remain negligible, accounting for less than one ton so far during the second year of the agreement. Overall, this confirms the general consensus that central banks are loath to sell any of their Gold in light of the appreciating price.

The International Monetary Fund’s most recent World Economic Outlook report estimates the Chinese economy will expand by another $8 trillion to $19 trillion by 2016. The U.S. economy, however, will grow by a lackluster $3.5 trillion to $18.8 trillion, making China the largest economy in the world within five years. That is 10 years earlier than the most bearish forecast and proof positive that we are in the midst of seismic shifts in the global economic landscape.  This is very bullish for the long-term price of Gold, given the Chinese appetite for the yellow metal, and commodities in general.

As a final comment, Canadians head to the polls Monday in a critical election that could produce anything from a Conservative majority government to an NDP-led coalition.  No matter how you vote, we do hope you exercise your right to vote and contribute to Canadian democracy.  We are so fortunate to live in the greatest country on the planet.

For what it’s worth, at BMR, our preference is a Conservative majority which would also be the most market-friendly outcome.  It never ceases to amaze us how the left in this country, or the United States for that matter, simply doesn’t “get it”.  As a classic example, the Toronto Star, Canada’s largest daily circulation newspaper and highly valued reading material among socialists and liberals in this country, came out today with an endorsement of the NDP (The National Post and The Globe and Mail have each endorsed the Conservatives).

“The last thing Canada needs,” the Star wrote, ” is an affirmation of a government …determined to further diminish the role of the state in charting a better future for the country…the platform the NDP offers voters is ambitious and puts people first (our emphasis).  It focuses on seniors, health care and the environment. It is in the broad tradition of nation-building that has long been at the heart of Canadian politics.”

What the left doesn’t understand is that the only way government can truly help its citizens is by living within its means and fostering conditions that allow the private sector to flourish and create wealth.  The massive accumulation of debt at federal, provincial, state and municipal levels throughout North America (and elsewhere in the world) represents a huge threat to each and every citizen and future generations.

Lower taxes, less government intervention in the economy and a substantial reduction in the unsustainable pace of government spending are all required in order to create more wealth in this country and maintain some of the precious programs Canadians hold so dear.  As individuals, we must also take more personal responsibility for our financial and physical health – government is already far too stretched and can’t solve every problem or eliminate poverty.  There has not been an honest or valuable debate about health care in this campaign (or other issues for that matter) and the potential train wreck provinces and the federal government are facing in terms of costs.

Canada is blessed with abundant natural resources and many other advantages.  The best approach to the challenges we face and the opportunities we have is to keep taxes low and curtail government’s natural appetite to spend.  Smaller and smarter government is not just an ideological position, it’s a necessity given unsustainable debt levels as this 21st century progresses.  Behind Jack Layton’s smile are potentially disastrous Trudeau-style 1970’s policies that would threaten our vital trading and security relationship with the United States, investment, jobs and possibly even national unity.  And your stock portfolio to boot.