TSX Venture Exchange and Gold
The Venture Exchange was off 13 points for the week but finished on a positive note with a 4-point gain Thursday followed by a 13-point advance Friday. At 1752, the CDNX is down a whopping 11.5% for the month of August but as John’s chart shows (we first posted it Friday night), a recovery appears to be underway. A lot of quality “merchandise” on the CDNX has been priced down considerably this month – that’s usually a good time to buy – and a tsunami of exploration results is expected to hit the market over the next several weeks. Vacations are ending and lackluster trading volumes will pick up. So we do expect an improved environment for the speculative juniors heading into September even if Gold is in a consolidation phase. The performance divergence between the junior and venture stage mining companies relative to their senior peers has not seen such spreads since the 2008 credit crisis – another reason to expect the quality speculative plays to rebound.
Fed Chairman Ben Bernanke’s speech at Jackson Hole Friday seemed to calm the nerves of the market, at least for now. The Dow was down as much as 221 points prior to Bernanke’s speech and then abruptly reversed course, finishing 135 points higher for the day and lifting the CDNX with it. Bernanke signaled, in our view, that the Federal Reserve is carefully weighing its options and could announce some new stimulus measures following an extended two-day meeting in about three weeks. However, he also made it clear that smart fiscal policies need to be implemented in order to address the U.S. economic slowdown and that means President Obama and Congress need to act wisely and as soon as possible. The question is, will that happen? Below are some of Bernanke’s comments and a link to the full text of his speech:
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability.
“The quality of economic policymaking in the United States will heavily influence the nation’s longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies.
“Economic policymakers face a range of difficult decisions, relating to both the short-run and long-run challenges we face. I have no doubt, however, that those challenges can be met, and that the fundamental strengths of our economy will ultimately reassert themselves. The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability.”
The emerging market growth story continues which is a fact highlighted recently by Bank of Canada Governor Mark Carney. That’s positive for commodities and overall global growth, and helpful of course for the CDNX. Copper, which closed at $4.09 Friday, has held up quite well considering all the recent doom and gloom. Scotiabank estimates that emerging markets now account for 67.8% of world copper consumption (China alone accounts for 37.3% while U.S. copper consumption has slipped to 9.1% of the world total). As investors, more than ever, we must maintain a global perspective.
Gold
What a week for the yellow metal. On Monday, Gold came within just $20 or so of John’s near-term Fibonacci target of $1,938. It then corrected rather violently, suffering its largest 2-day absolute fall in more than three decades. Gold found support at $1,700 and then immediately reversed to the upside Thursday and Friday, posting a whopping $58 gain Friday to finish at $1,829. After all of these ups and downs, Gold posted a weekly loss of just $24.
Last Sunday (August 21) in this space we posted the following:
“John’s near-term Fibonacci target is $1,938 and we could see that as early as tomorrow – who knows. However, Gold has become hugely overbought technically at the moment. It has simply gotten ahead of itself, albeit only temporarily. A 10% correction would be a healthy development and certainly wouldn’t be surprising. Gold is making its longest run of weekly gains since April, 2007. That’s when pullbacks usually happen, and Gold has also climbed abnormally above its 200-day moving average (SMA). The mainstream media are also now jumping on the Gold ‘story’ and that’s another sign that we have just seen, or we’re about to see, a short-term top. We emphasize short-term because, as we have repeated many times in this space, our belief is that we are witnessing the bull market of a lifetime in Gold and $3,000 an ounce as early as next year can’t be ruled out.”
Where To From Here?
So, after last week’s correction and then a two-day reversal, what’s next for Gold?
Don’t get too excited by Friday’s $58 jump. We’re convinced that Gold is now in a consolidation phase and while that likely won’t last very long, the downside risk is about $1,620 an ounce which we believe will then be followed by a dramatic and perhaps parabolic move to the upside. Those who are stating that the “bubble” in Gold is over are in for the surprise of their lives – the “bubble” hasn’t even started yet. First, Gold needs to consolidate. Then it’s all-systems go for lift-off. Below, John shows us what to expect during this consolidation phase.
Silver was down $1.40 an ounce last week to $41.50. Crude Oil was up $2.81 a barrel to $85.07 while the U.S. Dollar slipped one-quarter of a point to 73.99.
The “Big Picture” View Of Gold
As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being driven by both the Fear Trade and the Love Trade. The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, is having a huge impact on Gold.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, governments and world leaders in general, 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.
What’s also driving Gold is the weakness of the United States, brought on in no small part by one of the most ineffectual Presidents the nation has ever been saddled with. America has lost its way and the recent S&P downgrade is both a real and a symbolic reflection of that. Since the summer of 2009, the U.S. economy has produced a net total of just two million jobs while federal spending has gone through the roof. Throughout its incredible history, the United States has demonstrated an amazing resiliency and the ability to bounce back from major economic, social and political troubles. It will do so again but this will take time and a real Commander-in-Chief in the White House by November, 2012. By then Gold will have climbed another 50% or more.
