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TSX Venture Exchange and Gold

The Venture posted a modest 3-point gain last week, finishing at 884, and held up extremely well in the face of Gold’s $29 an ounce drubbing Friday.  In fact, an important change in trend that started at the beginning of April is powerful evidence that a turnaround in bullion is not far off and that now is an historic buying opportunity in the higher quality juniors.  During the 2nd quarter, the Venture Exchange – while it still fell – out-performed both Gold and the TSX Gold Index, and that trend has continued into the beginning of Q3.  The Venture is always a leading indicator, and its relative under-performance vs. Gold and the Gold Index that began in the spring of 2011 was a major warning sign that a top was drawing near in both Gold and Silver.  Right now the opposite is occurring, and we have a couple of rather stunning charts to illustrate this as part of Monday’s Morning Musings.  We’re not saying Gold has found a bottom just yet, or even that the Venture has necessarily hit bottom.  But the current period in our view is remarkably similar in an opposite way to late 2010-2011 – that was the time to be a seller, when the Index was within 10% of a top.  Now is the time, in our view, to be accumulating in a selective way some incredible opportunities that have been knocked down to mere pennies in some cases.  When the reversal comes, it will likely be explosive but limited at first to the best quality plays.  If we’re right, this is when fortunes are born.

Below is a 9-month daily Venture chart from John.  Strong support levels are at 860 and 800.  The still-declining 20-day moving average (SMA), not shown on the chart, is at 900.  There is important resistance around 920 as John points out.  If and when the 20-day reverses to the upside later this month, this would be a clear indication that a summer rally is kicking in.  In the meantime, it’ll be important to keep a close eye on the performance of the Venture relative to Gold and the Gold Index to see if the change in trend that started at the beginning of Q2 continues.  Despite all the gloom, doom and fear out there (actually a positive sign as that’s what creates a bottom in a market), we believe there are a lot of reasons to be excited right now.  On the ground, we expect some exploration fireworks in British Columbia this summer which could provide the spark to help ignite this market.

Gold

Gold reacted negatively to Friday’s stronger than expected U.S. jobs report, and could certainly re-test the $1,150 to $1,180 support band in the near future.  But the best way to cure low prices is through low prices.  Cutbacks are occurring not only in exploration (where are the deposits of the future going to come from?), but also in production with some mines simply unprofitable below $1,200 Gold.  In fact, the CEO of Gold Fields recently indicated that the average all-in cost to produce Gold in Africa is $1,500.

Below is a 2-year weekly chart from John that shows the bearish trend continues but smart money, in our view, is buying into it.  The bottom could be around $1,100, but if you get greedy and try to get in at the very bottom on any commodity or stock you’ll often miss out on a sudden and sharp reversal to the upside.  Gold and Gold stocks are getting thrashed in the mainstream media which makes the case for a turnaround this quarter all the more convincing.

Robust Demand For Gold In China

As Frank Holmes pointed out in his weekly Investors Alert (www.usfunds.com), net Chinese Gold imports jumped 40% in May from the month before.  Analysts at Stifel Nicolaus noted that China has already imported about 20 million ounces of Gold in 2013, compared to 26.7 million in all of 2012 and 13.8 million in all of 2011. If these import numbers hold up through the year, they would equal about 50% of global mine production. Or as Paolo Lostritto of National Bank Financial puts it, the Chinese buying exceeds the total GLD ETF liquidation.  This is phenomenal and should, in our view, put a floor on Gold around the 50% retracement level ($1,088) from the low of $253 in 1999 to the high of $1,924 in 2011.  That’s a very normal pullback in the context of a long-term bull market that remains fully intact.

Gold was down $8 for the week, closing at $1,232.  Silver fell 76 cents to $18.90 but remains in a strong support band.  Copper was off 2 cents to $3.07.  Crude Oil (WTIC) hit a 14-month high, climbing $6.66 a barrel to close at $103.22 as U.S. stockpiles decreased and unrest grew in Egypt.  The U.S. Dollar Index gained 1.27 points to finish at 84.45, just beneath the May high of 84.60.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, the long-term bull market in Gold has been 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, has had a huge impact on bullion.  Despite its current weakness, the fundamental long-term 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, a Fed balance sheet now in excess of $3 trillion and expanding at $85 billion a month, money supply growth around the globe, massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, emerging market growth, geopolitical unrest and conflicts…the list goes on.  However, deflation is prevailing over inflation in the world economy and this had a lot to do with Gold’s recent plunge below the technically and psychologically important $1,500 level, along with the strong performance of equities which are drawing money away from bullion.  Where and when Gold bottoms out in this cyclical correction is anyone’s guess, but we do expect new all-time highs later in the decade.  There are many reasons to believe that Gold’s long-term bull market is still intact despite a major correction from the 2011 all-time high of just above $1,900 an ounce.