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TSX Venture Exchange and Gold

Handling and managing volatility is an investor’s biggest challenge, especially in the very speculative junior resource market.  This month has certainly been a test of resolve and nerves for many of us with an unexpected significant drop in commodities and a Venture Exchange that finished August on a very strong note but is now suffering the consequences of a surging U.S. Dollar Index which has driven Gold to more than an 8-month low.

The good news is, the Dollar Index can’t defy the Law of Gravity.  Now on an amazing 10-week binge, this is the most enduring greenback run on record.  The Dollar Index is now pushing against stiff resistance around the 85 level and is clearly temporarily overbought.  Momentum traders could take it higher still, with Gold as a result testing support at modestly lower levels, but now is not a wise time to be a “follower” as sudden reversals in these markets are likely close at hand.  Be patient, don’t panic, and look for opportunities in high-quality situations where fearful investors are making mistakes.

Below is a 1.5-year Venture chart that should comfort investors concerned about the drop below the 970-980 support zone.  The Index closed Friday at 955, a 33-point fall for the week (volume was tepid, a positive sign) which has taken the Venture’s RSI(14) on the 1-year daily chart to its lowest point of the year, well into oversold territory.  That’s a signal to be looking for buying opportunities – historical patterns have demonstrated that, time and again.  Yes, the Index could back off some more but don’t succumb to the “fear factor”.  Fear and greed do rule the markets.  As a famous saying goes, be fearful when others are greedy; be greedy when others are fearful.

This 1.5-year weekly Venture chart shows the formation of an important symmetrical triangle and a support band between 918 and 955.  The uptrend line from last year’s low of 859 currently intersects just above 920.  Keep in mind, the 200-day and 300-day moving averages continue to rise, and brief drops below these SMA’s during primary uptrends in any market are not unusual.

Fundamentals are important and what the Venture needs right now – what investors could really use – is a “confidence booster”, a success story on the exploration front.  We’re confident there is one (or more) on the way.  Stay tuned and keep the faith.

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

Continued strength in the greenback put more pressure on Gold and commodities in general last week, with bullion dropping another $12 an ounce to $1,216 after previous weekly drops of $40 and $20.  Short-term technical indicators are certainly flashing “overbought” for the Dollar Index and “oversold” for Gold, though a brief near-term test of the $1,200 support area for bullion certainly can’t be ruled out as we indicated in this space last weekend.  In fact, one possibility is that “big money” may attempt to push Gold slightly below levels that trigger stop-loss orders, with smart traders then swooping in at their prey like sharp-eyed eagles.   That’s when bullion could stage a sudden and dramatic reversal.

Commercials have significantly reduced their net short positions recently, according to the latest COT data, and that’s another sign that Gold is nearing an important low.  Betting against the commercials is almost always a losing strategy.

Below is a 6-month daily Gold chart with classic oversold conditions.  RSI(14) is even more oversold than it was in late May/early June, just prior to a $100 advance in the metal.  -DI has either peaked or is in the late stages of peaking.  Again, momentum traders will attempt to push Gold down further – greed in reverse – and they may succeed, but the downside is limited in our view based on the current conditions that are nearing extreme levels.

Silver fell 82 cents last week, after a 58-cent plunge the previous week, to finish at $17.79 (updated Silver charts Monday morning).  Copper added 2 pennies to $3.13.  Crude Oil was up 14 cents to $82.41 while the red-hot U.S. Dollar Index climbed a full point to to 84.80.

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 in our view. 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.