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TSX Venture Exchange and Gold

Note:  Canadian and U.S. markets are closed Monday for Labor Day.  Morning Market Musings resumes Tuesday. 

The Venture enjoyed a powerful week, surging 23 points or 2% on increasing volume to finish August in the green at 1024.  The Index takes a 7-session winning streak into September.

Recently, we noted how an RSI(14) breakout had occurred above a Venture short-term downtrend line in place since early July.  This was a bullish development and also coincided with increasing buy pressure as shown by the CMF.  These very positive signals were early indications of a pending Index breakout which is exactly what has unfolded – a breakout above an important resistance band between 1000 and 1020.  As suspected, the 990 area was the bottom of the mini-pullback that started in early July, continuing the pattern of higher lows we’ve seen throughout the year.

With the Venture behaving like this, there’s no way Gold is about to fall out of bed.

This 6-month daily chart shows the breakout above both the downtrend line mentioned above and three Fib. resistance levels.  Any slight pullback early this coming week would be a buying opportunity with Venture support expected to be very strong around the rising 10-day moving average (SMA) and/or one of the top two previous Fib. resistance levels (1010 and 1020).

Buy pressure is increasing rapidly as shown by the CMF.  RSI(14) at 67% on this 6-month daily chart is likely to push past the 70% level and remain in overbought territory for a period in September.  There is some minor chart resistance (1027 and 1039) on route to the March high of 1050, but we do expect the 1050 level to be taken out this coming month.  Fundamental factors should come into play – some exciting drill results and firm or higher commodity prices.  Perhaps an upside surprise in Gold and Silver.

Venture 5-Year Weekly Chart

It has been critical in recent months to understand the Venture’s primary trend and the key support and resistance areas.  Staying focused on the “Big Picture” and not acting imprudently or impatiently in any market is the key to making money.  Below is the updated 5-year weekly Venture chart with a Gold comparative.  Note the string of higher lows the Venture has made since bottoming at 859 in June of last year.

Significantly, RSI(14) on this 5-year weekly chart recently again successfully tested the uptrend line (very healthy) around 50% which has held as critical support after serving as resistance since mid-2011 (major trend change).  A modestly overbought condition in the RSI that emerged in March when the Index hit 1050 gradually unwound to this new support, followed by the start of the current new uptrend.

The Q2 decline that took the Venture to superb support at 968 May 20 came on light volume, and accumulation (CMF indicator) remained steady and strong.  We’ve seen the most extended period of healthy accumulation in a few years.  This is a very bullish dynamic, and includes a recent +DI/-DI crossover.  Those who gave up on this market during the 8% retreat from 1050 made a profound miscalculation.  Astute investors have a great chance to cash in big over the next couple of months in particular before the possibility of a more substantial correction late in Q4 or very early in 2015.

Understanding Venture Cyclical Patterns 

We appreciate all feedback from our readers.  On Friday, we had a comment as follows:

“I hear BMR’s message about the TSX Venture breaking out, BUT I also remember August 2008 VERY WELL! I was euphoric back then, then September came.

Well, Danielle Park’s message is tempering my complete “buying in” for your view of the Venture, this go around. Any comments on her views especially her take on QE?

We have great respect for Danielle Park (www.jugglingdynamite.com), and we agree with some of her views.  However, a picture tells a thousand words and – no disrespect intended – we’re surprised this reader would state that he was “euphoric” in August 2008 at a time when he should have been running for the hills.  This is why TA is so critical.  August 2008 was a time to be deeply concerned about the state of the markets and that statement is not made with the benefit of hindsight.  The Venture clearly broke below key support in July 2008, long-term moving averages had just gone into reverse and this was a very bad omen.

With two charts we’re going to compare that period with what’s happening now, and you’ll see that the difference is like night and day.

Venture Chart #1 – June 2005 to June 2009

In this first monthly chart, notice how RSI(14) topped out in the early part of 2006 but an RSI(14)/price divergence occurred in 2007 when the Index peaked around 3300.  That was the first warning of potential trouble ahead.  The CDNX reversal began in late 2007 when the 200-day SMA turned south (followed shortly after by a reversal in the 300-day).  Note as well how an RSI(14) downtrend line had also formed.

The Index seriously broke down in July 2008 when it fell below critical chart support around 2250.  It was game over at that point.  The Venture’s strong under-performance vs. the major indices and commodities was actually foreshadowing the possibility of an overall market crash.  Indeed, that’s what ensued, and the Venture bottomed just below 700 a few months later when the fear level was at its highest.  This marked one of the greatest opportunities ever to make a fortune in the market, and the Venture soared all the way to 2465 by early 2011.  Extreme fear in late 2008 was eventually replaced by extreme greed.

Venture Chart #2 -August 2010 to August 2014

This chart shows the early 2011 Venture high (note the RSI(14) extreme and the peak in the +DI) followed by the reversal that began in earnest in the third quarter of 2011 with the bearish +DI/-DI crossover and a reversal to the downside in the 200-day SMA.

A whopping 65% correction ended in late June 2013 (greed reverted to fear again) which also marked a low point in the RSI(14) and a peak in the -DI.

As we stressed last fall, the Venture broke above a long-term downtrend line and then the reversal was confirmed earlier this year as the Index crossed above its 200-day SMA which also then reversed to the upside.  The 300-day has also just turned higher – hence, either buy this market now or chase higher prices later.  As simple as that.

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 carry out exploration or 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.

Gold

Geopolitical tensions are giving Gold a bid, preventing prices from falling below important support in the $1,270’s.  On the other hand, Gold is being restrained on the upside by a strong greenback which has surged to more than a 1-year high.  A ramping up of geopolitical tensions, and an increase in physical demand from China in particular, will be necessary in order to push bullion through important resistance between roughly $1,300 and $1,330.  The behavior of the Venture suggests that a surprise to the upside in Gold is more likely than a downside shock.

Gold 6-Month Daily Chart

Silver gained 6 cents last week to finish at $19.46.  Copper fell a penny to $3.19.  Crude Oil gained $2.31 a barrel to $95.96 while the U.S. Dollar Index added almost half a point to close at 82.74.

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 and will continue to support prices.   Despite Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact based on the following factors:

• Growing geopolitical tensions, fueled in part by the ISIS terrorist group and a highly dangerous and expansionist Russia under Vladimir Putin, have put world security in the most precarious state since World War II;
• Weak leadership in the United States and Europe is emboldening enemies of the West;
• Currency instability and an overall lack of confidence in fiat currencies;
• Historically low interest rates
• Continued strong accumulation of Gold by China which intends to back up its currency with bullion;
• Massive government debt from the United States to Europe;
• Continued net buying of Gold by central banks around the world;
• Flat mine supply and a sharp reduction in exploration and the number of major new discoveries.

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 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 and the reluctance of central banks to increase interest rates.