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TSX Venture Exchange and Gold

To use a boxing analogy, the CDNX took a couple of hard blows last week but managed to stay on its feet.  No knockout punch has yet been delivered but this “boxer” is getting tired and is vulnerable.

The CDNX held support between 1575 and 1600 and closed the week at 1608 for a loss of 33 points or 2%.  That performance was actually quite impressive considering other markets suffered larger declines – Gold (3.6%), the Dow (2.94%), the S&P (3.81%), the Nasdaq (3.03%) and the TSX (3.1%) all finished even more in the red last week.

The CDNX’s 10-day moving average (SMA) has reversed to the downside but the 20-day is still advancing.  The declining 50-day SMA, currently at 1590, has provided strong support this month in a pattern, however, that is very similar to the one witnessed in July.  Of particular concern is that the critical 300-day SMA, which has flattened out after rising since late 2009, is in imminent danger of reversing.  It will likely start declining aggressively by January at the latest.  Ignore this bearish technical signal at your peril.  The resistance band between 1600 and 1700 also has a declining 100-day SMA just above the top of it, and tax-loss selling pressure will also be a factor over the coming few weeks.  The risk-reward ratio is simply not attractive with the CDNX right now.  The likelihood of a plunge below 1575 appears significantly greater than a breakout to the upside above 1700.

Gold

The European bond market was a major factor in last week’s market weakness, driving many traders/investors into cash which also affected Gold.  The yellow metal fell through some support at $1,750 and closed the week down $64 an ounce at $1,725. For November, Gold has been range-bound between $1,700 and $1,800 and that trend could very easily continue.  Below $1,700 there is strong support at $1,675 and huge support around $1,625 which is the bottom of an important trendline as shown by John’s chart.

Central banks continue to be major buyers of Gold.  Official net purchases of Gold exploded in the third quarter, totaling 148.8 tonnes, more than double the entire amount of government buying in 2010 according to the World Gold Council in a report issued Thursday.  Asian and Latin American nations, which for years have plowed their excess cash into U.S. Treasuries, are suddenly looking to diversify.  The result is net Gold purchases of about 350 tonnes over the first nine months of the year, compared with 76 tonnes in 2010.  In 1988, the last year governments bought more Gold than they sold, net purchases were 180 tonnes.

There was a burst of official purchases in the final weeks of the third quarter, suggesting reserve managers jumped on a sudden drop in Gold prices.  This has be viewed as very bullish for Gold.

Silver was off $2.25 for the week, closing at $32.41.  Copper fell 6 pennies to $3.41.  Crude Oil finally pulled back.  It briefly topped $100 a barrel last week but closed Friday at $97.41, a decline of $1.41 for the week.  The U.S. Dollar Index, meanwhile, gained over a point to close at 76.91.

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.