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TSX Venture Exchange and Gold

The CDNX fell to a nearly six-month low Tuesday when it plunged to 1957 but the Index rebounded from there through the rest of the week, albeit on low volume, to close Friday at 2031.  The Index was off just 7 points for the week but for the month it’s down a whopping 9.8%.

We may find out this coming week (trading resumes Tuesday after the Victoria Day holiday) if the 63-point gain Wednesday through Friday was just a bounce within a continuing decline, the start of a significant rally or indeed the beginning of a major reversal as witnessed during similar trading patterns in 2005.  We’re at a critical juncture with the CDNX and there’s a very good probability in our view that this correction has run its course and that a powerful “Wave 5” move to the upside is just beginning.   We don’t make that statement lightly. We’ll explain the intriguing technical situation in detail in a very important chart analysis from John by Sunday night or Monday morning. In addition, we’re preparing a list of individual stocks that could be early movers which we’ll post if and when there is confirmation of this potential new uptrend.

The drop from the March high of 2465 to last Tuesday’s low was 508 points or 20.6% over 51 trading sessions.  Interestingly, that’s almost an exact repeat of what occurred between March and May, 2005.

Historical CDNX corrections:

2004  – 19% drop over 31 trading sessions from early April to mid-May (1890 to 1530)

2005  – 21% drop over 50 trading sessions from March to May (2025 to 1590)

2006  – 29%  drop over 22 trading sessions in May (3300 to 2350)

2007  – 29% drop over 17 trading sessions in August (3320 to 2350)

2008  – 18% drop over 12 trading sessions in January (2875 to 2350)

2010  – 21% drop over 45 trading sessions from May to July (1688 to 1343)

If you were a buyer toward the end of the six major corrections cited above, you likely made A LOT of money.  The CDNX rebounded sharply after each of those corrections.  Excluding the extraordinary fall of 75% over the last half of 2008, which we’ve left out as it was an anomaly, the average percentage decline in the six major corrections cited above between 2004 and 2010 was 22.75% over an average duration of 29.5 trading sessions.

After the CDNX bottomed in May, 2005, it climbed 40% over the final seven months of the year with a mild correction in October.  The reversal that year began as soon as the Index moved above its 10-day moving average (SMA) which quickly turned to the upside after a lengthy decline.

Interestingly, the CDNX Friday closed just a few points below its currently declining 10-day SMA.  It’s critical to pay attention to this next week – if the Index climbs above its 10-day SMA, and if that SMA then reverses to the upside, watch out – the “buy signal” lights will be flashing like crazy and this market could take off in a hurry.

On the other hand, there is a chance – for which we’re assessing a lower probability – that what we could be seeing now is a “dead cat” bounce that ends at the 10-day SMA where there has been resistance for the past month.  The very poor performance of the Venture Exchange in relation to the broader markets and Gold since the beginning of March is clearly a matter of concern given the fact the CDNX has proven to be such a reliable leading indicator.  However, it could be argued the CDNX simply needed a “cool down” period and a significant correction after more than tripling in value between late 2008 and March of this year.

The performance of the CDNX this year, while out of line with the Dow, the Nasdaq, the TSX and Gold, is comparable to stock markets in some of the emerging economies.  India, for example, is down 11% for the year vs. 11.2% for the CDNX.  Brazil is off 7% while Russia has fallen 15% over the last month-and-a-half.  China is flat for the year.  Inflation in the emerging markets has been a key concern for many months now but some economists are speculating that for now at least it may have peaked or will soon start to level off, allowing for a loosening of monetary policy beginning in the second half of this year.  That would likely give equities a boost in the emerging markets which may also be very positive for the CDNX.

Gold

Despite strength in the U.S. Dollar, Gold rallied strongly on Friday as it gained $20 an ounce after being in negative territory for part of the day.  It closed at $1,513.50 for a weekly gain of $18.50.  For the past couple of months Gold has found consistent support at its rising 30-day SMA, and it seems to have gotten quite comfortable around the $1,500 level which is important.

Volatility continues in Silver but for the week it was down just 14 cents $35.06.

The U.S. Dollar Index was up over half a point Friday but still closed the week down very slightly (less than one-tenth of a point) at 75.66.

Gold demand continues to be strong.  First quarter world Gold demand grew 11% from the same period a year ago to 981.3 metric tons, according to the World Gold Council (WGC) in its quarterly supply/demand trends report released a few days ago.  Much of the increase was due to investment demand with a 52% jump in purchases of bars and coins more than offsetting a decline in holdings of exchange-traded funds.  Jewelry interest also rose with China and India collectively accounting for nearly two-thirds of the global jewelry demand.

The WGC issued a included a separate section on China in the quarterly supply/demand trends report (data was compiled by the consultancy GFMS).  In the spring of last year the WGC issued a report stating it expected Chinese Gold demand could double over the next decade.  “With the sustained momentum in Chinese Gold demand, this target will probably be achieved in a shorter time scale,” according to Eily Ong, investment research manager with the WGC.  Gold demand grew by a whopping 32% in China last year despite a concurrent 25% rise in the average local currency Gold price.

Demand for Gold in China was so strong during the first quarter that for the first time the country outpaced the combined total of the developed West. If you lump together the Gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries (despite large  increases in demand from France, Germany and Switzerland), the sum of these countries is still outpaced by China.

A slight pullback in prices during the middle of the first quarter and “persistent high inflation levels” pushed China into the position as the world’s largest market for Gold investment. Chinese citizens devoured nearly 91 tons of Gold bars and coins, more than double the amount of a year ago.

This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.

Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation.  Just imagine the total wealth in China and even a small percentage of that choosing to buy Gold. This demand is going to be enormous.”

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, and 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.