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TSX Venture Exchange (CDNX) and Gold

The CDNX fell to its lowest point in nearly eight months last week, closing at 1898 for a weekly loss of 37 points.  Friday, the Index dropped to 1885, slightly below its rising 300-day moving average (SMA), but then staged a mild rally to post just its third daily gain over the last 15 trading sessions.

This has been a nasty market since early March with several deceptive moves.  But despite all the gloom and doom at the moment, it’s critical to point out that from the high of 2465 to last week’s low of 1885, the correction in the CDNX over the past four months has been very normal (23.5%) and certainly within historical parameters.  There is nothing unusual about what has happened – a healthy pullback within an ongoing bull market, exactly what we’ve witnessed in just about every year over the last decade. These have always been great buying opportunities.

Historically, the 300-day SMA has been a strong supporting moving average for the CDNX.  Market bottoms occurred in 2002, 2003, 2004, 2005, 2006, 2007, and 2010 when the Index fell slightly below its 300-day for a brief period.  So it’s possible we could see some minor additional weakness as the market officially bottoms out, but the odds clearly suggest this correction has essentially run its course.  The 200 and 300-day SMA’s are still rising, confirming the continuing healthy state of this long-term bull market.  This is not 2008.

The big question on investors’ minds is whether the global economy has hit just a temporary “soft patch” (caused in part by the disaster in Japan in early March) or if the current slowdown marks only the beginning of something much worse that could also cause debt issues in various countries, including the United States, to spiral out of control.  There are plenty of “fear mongers” out there at the moment (most of them can’t see beyond the borders of the United States) who are painting a very bleak macro picture of the world economic situation.  While there are clearly some major global concerns – chief among them being the Greek debt crisis that potentially could have some sort of domino style effect – we’re comforted by the fact the CDNX has gone through a very normal correction up to this point.  The CDNX is a valuable and reliable leading indicator.  It’s sell-off in March was clearly a sign that there was trouble ahead of some sort as we had warned about.  If the second half of this year is going to be better for the global economy, then we would now expect the CDNX to start reflecting that (some of the previous drops to the 300-day moving average and below have coincided with other global fears and very bearish market sentiment).

Technical indicators such as RSI, Slow Stochastics and the Chaikin Money Flow (CMF) all show the CDNX is in deeply oversold territory. The same applies to the Dow, the TSX and the TSX Gold Index.

All those who fear the “summer doldrums” on the CDNX, which is part myth, or another Great Crash as predicted by certain writers and analysts, have dumped their stocks.  There’s a lot of cash on the sidelines and it could come rushing back into the market at anytime.  In terms of the CDNX, there is going to be a tsunami of drill results and exploration news over the next few months and we wouldn’t be surprised if there is a major discovery somewhere that really ignites this market again.

In the beginning stages of a CDNX recovery, we suggest focusing on companies with strong cash positions and projects that are well advanced.  While our attention is mostly on the CDNX, one can’t ignore opportunities in the Gold space among producers on the big board (TSX) as well (we prefer the smaller producers).  One classic example is Richmont Mines (RIC, TSX) which is operating in an area we’re very familiar with – northwest Quebec.  Richmont closed Friday at $6.35.  It has all-category 43-101 reserves and resources of 2.5 million ounces, so its market cap of $200 million puts a value of just $80 per ounce on Gold in the ground.  The company recorded earnings of 28 cents per share in Q1 and will have another solid quarter April-June thanks to increased production and a higher Gold price.  There is a strong exploration component to Richmont as well with developments at Wasamac and elsewhere in that prolific area of northwest Quebec – the company is drilling aggressively and producing excellent results.  RIC is technically oversold – it’s down significantly from its all-time high of $9.75 just six weeks ago – but its chart is very healthy overall with rising 100, 200 and 300-day moving averages.  Richmont is truly a keeper for the long haul in this Gold bull market of a lifetime. So it’s critical right now to stay focused on the “Big Picture” – there are some great opportunities in this market for patient investors, and of course for traders too.

Gold

We suggest readers check out Frank Holmes’ excellent article (“Investor Alert – Will Gold Equity Investors Strike Gold“) posted last night at www.usfunds.com.  Holmes has one of the brightest minds in the investment industry and in that article he paints a very clear picture of how Gold mining shares present such a great opportunity at the moment for long-term investors.

Thanks to strong performance Friday, Gold was up $8 an ounce last week at $1,540 while Silver was off 39 cents at $35.90.  The U.S. Dollar Index rallied during the week but pulled back half a point Friday to close at 74.98.  It was up slightly for the week.  Crude oil has softened, hitting a six-week low of $93.

The Gold market will be focused on the Greek situation next week as well as Tuesday’s FMOC meeting and comments from Bernanke that emerge from that.  Technically, Gold is showing tremendous support at $1,500.  The market seems to be getting quite comfortable with that psychologically important price level which has to be considered bullish.

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 WGC in its quarterly supply/demand trends report released recently.  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.”

Central bank buying of Gold throughout emerging markets has been one of many contributing factors to the metal’s rise.  These banks have excess reserves and are looking for ways to diversify away from paper currencies for protection.  Last year was the first net positive year for central banks’ buying of Gold since 1985. They’ve chosen to own Gold over trying to guess whether Portugal or Greece’s debt is the best investment.

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.