BullMarketRun.com

TSX Venture Exchange and Gold

It was a roller coaster week for the Venture and the broader indices with no end in sight to the renewed volatility in equity markets that began in September.  However, what’s comforting is that the Venture seems to have found at least a short-term bottom within a projected support band between 760 and 800.  In fact, importantly, 800 support is deemed to have held after a temporary breach of that level was not technically confirmed.

For the week, the Venture was off 17 points to 810 after dipping as low as 769 in early trading Thursday before a sharp reversal kicked in.  On the long-term daily chart, the Venture’s RSI(14) plunged to an historical low last week.  Sentiment couldn’t be worse – an ideal breeding ground for either a bottom or at least a powerful rally.

The Technical Side

Technically, the Venture’s sudden collapse can be explained by the 9-month daily chart below.  As soon as the Index broke below a symmetrical triangle in early September, followed shortly thereafter by a breakdown below very strong and critical support around 970, the risk of a steep plunge increased substantially.  On September 30, the Index confirmed a close below an uptrend line around 920 going back to last year’s low of 859.  This also led to a reversal of the 200-day moving average (SMA) to the downside, setting the stage for a robust sell-off.

The Index is now working its way out of deeply oversold conditions and relief should come in the week ahead after a 7-week slide totaling 214 points.

The Fundamental Side

Fundamentally, the interesting fact is that the Venture’s 25% drop in 32 trading sessions (September 2 to October 15) occurred when Gold fell just 3.7% during that time while Copper slipped only 4.4% – historically, such a divergence between the Venture and those two metals could be unprecedented.  It’s not certain yet what that may mean.  However, the Venture’s tumble was much more in line with Crude Oil’s 17% drop over the same 32-session period which demonstrates how important the Index’s energy component has become.  In 4 months, WTIC fell 26% to Wednesday’s intra-day low of just under $80 a barrel – exactly matching the Venture’s decline over the same period.

In effect, junior resource investors became the victims of Saudi Oil market manipulation because there’s ample evidence suggesting the Saudis have engaged in a deliberate attempt to drive down the price of Oil.  We can understand why they would want to put the screws to Vladimir Putin’s regime, but they also see North America as a rapidly growing threat to their long-term Oil market share.

Oil appears capped at $90 for an extended period and could even fall into the $70’s unless OPEC members agree to cut production (seems unlikely), Putin does something crazy (always possible) or Baghdad falls and ISIS stampedes through all of Iraq and captures the country’s rich southern oilfields (within the realm of possibility given President Obama’s naive belief that air strikes alone can stop that evil from spreading – he has already foolishly told the enemy what he won’t do which is put U.S. combat troops on the ground).

Very weak Western political leadership, a deteriorating global economy and wobbly stock markets aren’t helpful to the Venture which needs something to grasp onto right now – how about a breakout in Gold?  That could be on the way as we explain below.

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 and therefore great opportunities for in Gold and quality Gold stocks – 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

Gold is looking interesting, and the coming week has the potential to feature a second major technical development this month.  The first one came early during the week of October 6 when the metal reversed after holding just above its 2013 double bottom low at $1,180.  The fact that bullion was able to maintain this critical support during an all-time record run by the U.S. Dollar Index – 12 straight weekly advances – was highly encouraging.  In addition, “smart money” commercial traders dramatically scaled back their net-short positions as the large speculators became increasingly bearish and fearful, especially after the October 3 close below $1,200 an ounce.  It’s important to point out that $200 rallies in Gold occurred following the two previous brief dips below $1,200.

Gold has posted back-to-back weekly gains, climbing another $15 last week to finish at $1,238.  Our 6-month daily chart is giving some bullish readings:  1) RSI(14) has pushed above previous resistance at 54%; 2) sell pressure is rapidly declining; and 3) a bullish +DI crossover has taken place.

If Gold is able to overcome a resistance band between $1,240 and the low $1,250’s, watch out – such an event would constitute a second major technical development this month, and frantic short-covering could immediately drive the metal considerably higher.  Some traders were disappointed that Gold didn’t react more favorably to last week’s sell-off in the equity markets.  On the other hand, buyers stepped in on a slight intra-day dip Friday and bullion finished the day relatively unchanged despite a 263-point Dow rally.

This chart sure looks like an important bottom formed October 6.

Silver fell 13 cents last week to close at $17.27 (updated Silver charts Monday morning).  Copper lost a penny to $3.03.  Crude Oil sank more than $3 a barrel to $82.75 while the U.S. Dollar Index declined for the second straight week, losing more than half a point to finish at 85.20.

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 (air strikes won’t stop them) 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.