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TSX Venture Exchange and Gold

The Venture posted its 2nd straight weekly gain and is on track for its 3rd consecutive monthly advance, a notable achievement given Gold’s 4.6% drop in September with just 1 trading day left.  The Venture closed Friday at 953, a 7-point increase over the previous week and just 5 points shy of a nearly 4-month high (958) reached September 19th.

The EMA-20, currently at 946, has been providing strong, consistent support for the Venture.  The key challenge for the Index now is to push through 2 important resistance levels – 955 and, more significantly, 970.  A breakout above 970 would also trigger a reversal to the upside in the 100-day moving average (SMA) and would push the Index to a nearly 6-month high – a very bullish development, if it were to occur.  Higher Gold prices would help.  So would a spectacular drill hole from somewhere (anywhere, please).  October has generally been a good month for the Venture with gains in 2009 (1%), 2010 (14%), and even 2011 (10%).  Last year, the Index was off slightly in October (1.7%).

Below is a 3-month daily chart from John.  Plenty of room for RSI(14) to move higher.  After dropping off for a brief period, buying pressure as shown by the CMF is picking up again.

The Seeds Have Been Planted (And Continue To Be Planted) For The Next Big Run In Gold Stocks

There’s no better cure for low prices than low prices.  The great benefit of the collapse in Gold prices this year is that it forced producers to learn to become much more lean and mean in terms of their cost structures.  Among many others, Barrick Gold (ABX, TSX), the world’s largest producer, said it may sell, close or curb output at 12 mines from Peru to Papua New Guinea where costs are higher.  Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their operating structures.  Exploration budgets among both producers and juniors have also been cut sharply.  In addition, government policies across much of the globe are making it more difficult (sometimes impossible) for mining companies to put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists.  Ultimately, all these factors are going to create a supply problem – think about it, where are the next major Gold deposits going to come from? On top of that, a recent Mineweb study shows grades have indeed fallen significantly just over the past decade.  For instance, grades in the South African Gold sector fell from an average of 4.3 grams per metric ton in 2002 to an average of 2.8 grams per metric ton in 2011.  It doesn’t take a rocket scientist to figure out that the next huge bull market in Gold stocks is just around the corner due to demand-supply dynamics, much leaner producers who will suddenly become earnings machines, and a junior market that will be healthier simply because a lot of the “lifestyle” companies sucking money out of investors will simply disappear or get taken over by individuals or groups who are actually competent and serious about building shareholder value.   A healthy “cleansing” in the market has been taking place.  As this continues, more and more seeds are being planted for an incredible future move in well-managed Gold producers and explorers that could make the dotcom bubble look like a tea party.  As for the juniors, focus on the small universe of companies that have the ability to execute both on the ground and in the market – companies that have the cash, the expertise, the properties and the drive to make discoveries that majors will buy.

Gold

Gold continues to hold important support around $1,300 and finished the week on a positive note with a $12 gain Friday.  That allowed bullion to finish $10 higher for the week at $1,336.  Important resistance is in the mid-$1,360’s and then $1,400.

It is becoming increasingly apparent that the Federal Reserve is in a sticky situation and may not have the nerve to begin scaling back its bond-buying program until at least December, if not later.  Fiscal and regulatory mistakes in Washington (Obamacare being one excellent example) have contributed to a very cautious private sector when it comes to hiring, so job growth just hasn’t been able to reach the level one would expect during a normal recovery.  The circus in Washington right now (the government is on the brink of a partial shutdown for the 1st time in nearly 2 decades) has the potential to escalate into a debt default, and one has to assume that would be bullish for Gold.  Isn’t it strange that President Obama can reach out to Iran, a nasty and evil regime that sponsors terror around the world and is a constant threat to Israel and the West, but he can’t reach out to Republicans in Congress or even certain members of his own party?  There is no Presidential leadership in Washington, and ultimately that may lead to problems for the greenback and the economy.  The last 3 years of Obama’s 2nd term are shaping up to be very challenging for this “community organizer”.  And what he may face in about a year is not only a Republican-controlled House but a Republican-controlled Senate – the opposite of what he had beginning in 2009 but messed up with.

A partial U.S. government shutdown is no big deal.  If anything, less government for a while will actually be refreshing.  But how the debt ceiling issue plays out of course will be critical.  At some point during the last half of October, the U.S. government may not be able to meet all of its obligations unless the debt ceiling is increased.  It appears some politicians in Washington don’t seem to have a problem with the possibility of a debt default – their line of thinking is that such an event might be necessary in order to wake up the masses to the government’s spending addiction.  Might be a sensible strategy.

Technically, Gold has found strong support at the Fibonacci 50% level (the retracement following the move from the late June low of $1,179 and the August high of $1,434) and appears ready to test resistance again in the mid-$1,360’s.  Below is a 3-month daily chart from John.

Silver was essentially unchanged last week at $21.78 (John has updated Silver charts in Monday’s Morning Musings as usual).  Copper added a penny to $3.29.  Crude Oil fell $1.88 to $102.87 while the U.S. Dollar Index was up slightly to 80.52.

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 this year’s drop, 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 (especially from China), 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 plunge during the spring below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew money away from bullion.  June’s low of $1,180 may have been the bottom for bullion – time will tell.  We do, however, expect new all-time highs as the decade progresses.  There are many reasons to believe that Gold’s long-term bull market is still intact despite this major correction from the 2011 all-time high of just above $1,900 an ounce.