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TSX Venture Exchange and Gold

The Venture held up extremely well last week as Gold plunged by more than 3%.  The CDNX, which lost just 5 points for the week to close at 984, continues to show every sign that its exceptionally strong support band (stretching from the 940’s into the 980’s) will hold, setting the stage for a powerful reversal of recent weakness and a resumption of the primary bullish uptrend in Q3 with selectivity, of course, remaining key.

While there could be some more churning within the support band over the next few weeks, it’s important to point out that RSI(14) on this 5-year weekly chart is finding its “comfort zone” in the immediate vicinity of the 50% level, as expected.  A modestly overbought condition in the RSI(14) that emerged in March when the Index hit 1050 has gradually unwound.  The recent decline that took the Venture to a monthly intra-day low of 968 May 20 came on light volume, and accumulation (CMF indicator) remains steady and strong.  A couple of months from now, investors will look back at this correction from 1050 as an incredible buying opportunity.  The nervous nellies who have been sellers as opposed to buyers in recent weeks – well, they’re betting on the highly improbable which is a breakdown of superb Venture support.  Those are very poor odds in our view.  The Venture will take the path of least resistance which means a significantly higher market over the coming months – perhaps not the mainstream view, but you don’t make big money by following the crowd.

Below is John’s updated long-term Venture chart.  The rising 200-day moving average (SMA) on this weekly chart is at 968.  This market should really start gaining fresh momentum as soon it pushes back above its 50-day SMA (currently at 996) and that moving average reverses to the upside – a technical event that should certainly occur during the last half of June, if not sooner.  Patience is the key, as always.  The third quarter for the Venture is shaping up to be a very dynamic period.

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

Gold sold off last week as it broke to the downside of a symmetrical triangle as you can see on John’s 6-month daily chart.  The apparent easing of Ukraine-Russia tensions, some encouraging U.S. economic data (durable goods orders in April were much better than expected, especially considering that March was revised significantly higher), and lack of signs of strong physical demand drove bullion beneath support levels that had held since late March/early April.

However, some important technical and fundamental points should be kept in mind.  First, the Venture has proven to be a consistent leading indicator of future Gold prices.  The fact that the Venture continues to outperform Gold, and barely budged last week in the face of bullion’s $42 drop, is a sure sign to us that Gold is not about to “collapse”.  It looks very possible that bullion will test a support band between $1,220 and $1,240, and potentially could even re-test the 2013 low, but the idea that Gold is about to “tank” is highly unlikely.  Traditionally, June is Gold’s worst month of the year, so we do expect some additional weakness over the short-term but prices should firm up significantly in Q3 when the metal typically performs very well.  Oversold RSI(14) conditions have emerged on the 6-month chart below which means the near-term downside potential from current levels is rather limited.

Gold traders took a negative view of Hong Kong’s April exports to China, reported at the beginning of the week, which fell to 67 tonnes from the prior month’s 85 tonnes. It should be noted, however, that Hong Kong Gold net exports to China in the first four months of the year rose 18% relative to the same period last year.  In addition, and this is important, China has started to allow Gold imports through its capital Beijing, in a move that helps keep purchases by the world’s top bullion buyer more discreet.  The opening of a third import point after Shenzhen and Shanghai could also threaten Hong Kong’s pole position in China’s Gold trade, as the mainland can get more of the metal it wants directly rather than through a route (Hong Kong) that discloses how much it is buying.  Less emphasis may have to be put on Hong Kong net Gold exports to China.

If Gold drops somewhat lower, as seems likely, traders will be looking for a pick-up in premiums on the Shanghai Gold Exchange as evidence that Chinese demand may help put a floor on prices.  Meanwhile, an expected increase in demand from India over the second half of the year should also help underpin prices.

Silver fell 66 cents last week to close at $18.81.  Copper fell 2 pennies to $3.15.  Crude Oil lost $1.64 a barrel to $102.71 while the U.S. Dollar Index finished relatively unchanged at 80.39.

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 Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact – 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 at $4 trillion and still expanding, 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 had a lot to do with Gold’s plunge during the spring of 2013  below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew “momentum traders” away from bullion.  The June 2013 low of $1,179 was likely the bottom for Gold.  Extreme levels of bearishness emerged in the metal last year.  With the long-term bull market remaining intact, we expect new all-time highs in Gold as the decade progresses.  Inflationary pressures should eventually kick in around the globe after years of ultra-loose monetary policy.