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TSX Venture Exchange and Gold

The Venture found support at the 1000 level, in the immediate vicinity of its rising 10 and 20-day moving averages (SMA’s), and closed relatively unchanged for the week at 1014 after rallying from an intra-day low of 995 Wednesday.  The underlying technicals continue to paint a very positive picture for the CDNX but investor patience is critical – this slow moving train is going in the right direction and at some point will pick up speed.  Fresh discoveries and/or a breakout in Gold would of course be key catalysts.  Gold pulled off an impressive intra-day reversal Friday but still has some work to do to bust out of its trading range.

Below is an updated Venture 5-year weekly chart.  The purpose of this chart is to show the overall technical strength underpinning this market, and the primary trend which is clearly bullish.  The wall of support around 970, built over many months, is hugely impressive and includes Fib. support, a rising 200-day SMA and a 300-day SMA that (very importantly) appears poised to reverse to the upside by the end of June.  By every measure of TA, the downside risk in this market at current levels is extremely limited (less than 5%).  The upside potential, on the other hand, significantly exceeds the downside possibilities.

As an investor, it’s always critical to weigh risk-reward.  The risks were high in late 2010/early 2011 when RSI(14) on the chart below, for example, was in extreme overbought territory for an extended period but greed was the dominant market psychology and many investors simply kept buying.  Conversely, the risk was much lower in the spring of last year when the RSI(14) had reached extreme oversold levels.  Unfortunately, few investors were willing to jump in at that point because fear and disillusionment had become the dominant mindset.  Obviously, this is how critical market bottoms are formed.

What stage are we in now?  Gradually, this market has emerged out of the fear stage but many investors – which is actually a bullish sign – are trapped in what one could call the “unconvinced” stage.  They generally feel more comfortable about the junior resource sector than they were a year ago but they have lingering doubts and their weak faith is easily shaken.  Rather than looking ahead, they’re still staring in the rear-view mirror and they see a lot of wreckage and aren’t convinced yet that this market has really turned the corner.  They need to see more evidence, more signs – they are also “followers” who tend to go with the herd.  This group represents a huge source of potential new buying.  The Venture technicals tell us that this group will finally start to make its plunge into the market in the near future, and by that we mean at some point during this second quarter/early third quarter.  By September they’ll be buying everything in sight as they finally come to the conclusion (many months after the fact) that the bear market is actually over.

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 in 2013 is that it forced producers (at least most of them) to start to become much more lean in terms of their cost structures. Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their their overall operations.  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 (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe).   Ultimately, all of  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.  Companies that are strong financially, have superior exploration prospects, competent management and clean share structures.

Gold

For the second week in a row, Gold staged an impressive intra-day turnaround.  This time it was on Friday as bullion fell as low as $1,276 immediately following the release of a much better than expected U.S. jobs number, and rallied to finish the day at $1,301.  Escalating tensions between Ukraine and Russia were supportive of Gold Friday, and will continue to be, while behind the seemingly highly positive headline jobs number (288,000) was a disturbing labor market participation rate, the lowest since 1978.

The U.S. jobless rate declined to 6.3%, but this drop was driven by continued worker exodus from the labor force which contracted by 806,000 individuals.  This is reducing counts of the unemployed and artificially reducing the unemployment rate.  The labor force participation rate – the share of adults in the labor force – tumbled to 62.8% of the working age population, from 63.2%.  Bottom line:  Expect the Fed to continue to reduce its monthly bond purchases, as they did again this past week, but the Fed will likely keep interest rates at historically low levels for the foreseeable future.  This is maintaining pressure on the U.S. Dollar which in turn is giving bullion some help.

Gold was off $3 for the week but buy pressure is picking up as you can see on this updated 1-year daily chart.  The $1,325 to $1,350 area is key resistance.  If Gold can overcome that hurdle with a confirmed breakout above $1,350, then the next stop is $1,400.  Very strong support exists in the $1,270’s as demonstrated again Friday.  A solid case can be made for a big move in Gold to the upside over the summer (that’s what the Venture seems to be hinting at), and that would catch a lot of traders by surprise.