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TSX Venture Exchange and Gold

Despite enduring a stretch of 12 losing sessions out of 13, dating back to October 28, the Venture continues to hold strong support around the 930 level and its now gently-rising 100-day moving average (SMA).  Last week, the Index fell as low as 921 intra-day Wednesday before reversing and finishing the week at 934, a 3-point loss from the previous Friday.

There are plenty of reasons for encouragement with regard to the Venture entering 2014.  John will update the 3-year weekly chart tomorrow.  It still shows the RSI(14) climbing an uptrend line, with the previous resistance of the 2+ year downtrend line now providing support (the Index broke above this major downtrend in late October).  The Venture tends to go in the opposite direction of the U.S. Dollar Index.  The greenback continues to look bearish and we’ll expand on that tomorrow as well.

Below is a 3-month daily Venture chart from John.  RSI(14) has found support and is now moving higher.  The SS indicator (%K) is reversing to the upside as well which is positive.

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 (at least most of them) to start to become much more lean and mean in terms of their cost structures. 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, grades have fallen significantly just over the past decade.

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.

Gold

Comments from incoming Fed Chairman Janet Yellen gave Gold a boost last week after it briefly hung around the $1,260 level.  Gold ended the week unchanged at $1,290, and it’s obvious that it continues to be range-bound between about $1,250 and $1,350 until a catalyst drives it outside of those boundaries – either up or down.  At this point, we tend to believe that Gold will surprise to the upside by year-end given the behavior of the Venture and the technical posture of the U.S. Dollar Index.  Yellen appears to be even more dovish in her views than Ben Bernanke, a fact that we believe spells trouble for the greenback and virtually guarantees the Fed will error on the side of the caution with regard to “tapering”.  Don’t expect the Fed to begin scaling back its bond-buying program until well into 2014.  The political environment in Washington, which could get even more poisonous, also won’t be conducive to Fed tapering.  Another budget battle is looming, and President Obama’s unwise attempt at social engineering in the form of a botched, disastrous health care system revamp is going to further embolden Republicans.

On the demand side, the continued shift of Gold from western hands into eastern hands is almost startling, and this has long-term bullish implications for bullion.  Last week, the World Gold Council pointed out that consumer demand for Gold via jewelry, bars and coins for the first nine months of the year hit a record of 2,896.5 tons. This was helped along, of course, by lower prices that made Gold more affordable for consumers.  “The vast bulk of the year-to-date growth in consumer demand for Gold came from Eastern markets; 90% of the 605-ton increase was accounted for by Middle Eastern and Asian consumers, as Gold continued to flow from West to East,” the report said.

A picture tells a thousand words.  Physical demand for Gold in China is at an all-time high.  Asians tend to be longer-term holders.  They are increasingly soaking up supply from the west.  What ultimately is going to occur is that the “east” – China in particular – will be in control of revaluing Gold at a much higher price.  Many American analysts especially just don’t get it.  They can’t see beyond the borders of the United States.

Below is a 3-month daily Gold chart update from John.  Nothing dramatic here, but the ADX indicator suggests the recent bearishness that drove Gold down to $1,260 last week has peaked.

Silver fell 73 cents last week to close at $20.78 (John will have updated Silver charts Monday morning as usual).  Copper slid 8 cents on supply concerns to finish at $3.17.  Crude Oil slipped again, falling 76 cents a barrel to close at $93.84.  The U.S. Dollar Index, meanwhile, couldn’t sustain a move above 81 and finished the week down nearly half a point at 80.81.  In September, the Dollar Index broke below a 2.5-year uptrend on the weekly chart, so it faces considerable overhead resistance as witnessed last week.

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 $3.5 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, deflationary concerns around the globe and the prospect of Fed tapering by the end of the year (not likely now) 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 $1,179 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.