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TSX Venture Exchange and Gold

It was an eventful week in the markets with China again taking center stage as it devalued its currency (debate rages about whether or not this was a “sneak attack” in the currency wars) and also mysteriously announced the 2nd update to its Gold reserves in a month after staying silent on that matter for nearly 6 years (read our comments with regard to China in the Gold section below).  The greenback showed continued weakness, and Gold pushed above resistance at $1,100 as the yellow metal posted its best week in 2 months.

Combine the above with a Sheslay surprise – Garibaldi Resources (GGI, TSX-V) sending in the “Grizzly Gang” which was a powerful message (greeted with an all-time daily volume record for the stock Friday) – and indeed it was a particularly interesting week given that we’re still in the dog days of summer.

On low volume, the Venture bounced between a high of 583 and a low of 570, closing down 4 points for the week at 573.  Declining short-term moving averages continue to restrain the Index as minor relief pulses since June have been unable to push above the 10 or 20-day SMA’s.  The 1st sign of a turnaround in this market will come when the Venture does climb above those resistance levels, and on increased volume.

While the Index was finding support around 580 which gave way at the end of the week (on decreased volume, however), there are reasons for encouragement looking at the broader picture based on 2 important charts.

Three specific points regarding this 1st chart (Venture 4-month daily):

1.  RSI(14) has emerged out of extreme oversold conditions and is now trending higher – a move through the 30% level would be significant

2.  Sell pressure has been declining consistently since late last month – important

3.  The -DI indicator has likely peaked

Overall, the Index is obviously still mired in unchartered territory.  RSI levels became very extreme at the end of July – similar to the situation last December – and they have slowly started to recover while the Venture has continued to edge slightly lower.  This divergence between RSI and price is actually a good sign as it’s often seen while an important low is being formed.  John’s estimated Fib. support levels range from 547 to 580, and within that band is likely where a bottom – at least a temporary one – will be produced.

The smart money in our view is on the buy side with the highest quality juniors, while there are also excellent opportunities among select Gold producers on the senior exchanges.

Venture 4-Month Daily Chart

Hope In The Form Of The Venture’s 39-Week “Cycle”

We do see a good possibility of a significant turnaround commencing on the Venture within the next several weeks, simply based on its 39-week “cycle”.  Interestingly, this also fits within the timeline of the Fed’s next meeting in mid-September – a crucial one, indeed (we doubt the central bank has the courage to pull the trigger on its 1st rate hike in 9 years given the global growth problem and deflationary concerns which are even greater now given the Chinese currency devaluation).

Strangely enough, over the last 15 years, there has been a consistent pattern of trend reversals (in price and RSI) around the end of each 39-week period on the Venture – you can see it quite clearly on the fresh version below, through Friday, which is important to look at and understand.

What this chart suggests is that some sort of turnaround will likely occur around the end of August into the beginning of September – that’s when the current 39-week period expires.

The vertical blue lines separate each 39-week period.

Commodity Pressure On The Venture

While a Gold rally has ensued, as expected, Crude and Copper (and a host of other commodities) remain vulnerable with the CRB Index now at a post-Crash low and critical support.

Global deflationary pressures, driven in part by the collapse in Oil prices as well as the China growth “engine” slowing down significantly, could put even more pressure on the commodity sector before the summer is over.  If Crude ultimately declines into the mid-$30‘s, which seems very possible given fundamental and technical considerations, the CRB would likely test support at 180, almost 10% below where it closed Friday.  Such a development would obviously impact the Venture, though keep in mind that the Venture reversed a few months prior to the CRB following the 2008 Crash.

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, and recent weakness with the drop below $1,100, is that it has forced producers to become much more lean in terms of their cost structures. Producers, big and small, continue to make hard decisions in terms of costs, projects, and rationalizing 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 eventually create a supply problem and therefore great opportunities 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.

U.S. Dollar Index Update

Our contention for the last several months is that the Dollar Index put in its high for the year during March-April based on what has proven to be, so far at least, a very reliable 9-month daily chart.  Fundamentally, a runaway dollar would not be healthy for the U.S. or global economies, so one can be certain the Fed is keeping a close eye on movements in the greenback (the Chinese appear to be, as well).

What occurred this past week was what we were expecting – a breakdown in the RSI(14) uptrend line from the rebound that started in mid-May.  The 100-day SMA (not shown on the chart below) has also reversed to the downside, a bearish sign.

We now expect the RSI(14) to continue to trend lower, following the downtrend line to the 30% support level (it’s now at 45%, a week ago it was 55%), and this would give a further boost to Gold.  Nearest Fib. support ranges from approximately 92.5 to 95.5.  Note that the price uptrend line since mid-May now intersects with the Fib. 61.8% level (95.43), so that’s an important area that the bulls won’t want to see fail.

Ultimately, what we perceive as a growing possibility (though not a certainty) over the remainder of the year for the U.S. Dollar Index is a test of base support at 88.  That’s definitely not a mainstream view but the chart supports that kind of consolidation potential following the record advance that started during the summer of last year.

Gold

As we stated a week ago, it’s never wise to go against the commercial traders who recently dramatically reduced their net short positions to extreme levels.  Such action was a valuable clue that bullion was ready for a rally, not a near-term collapse down to $1,000 as many pundits were predicting.

What’s China Up To?

China’s move to devalue its currency was Gold-bullish, but what also helped the metal this past week was the fact that China made a disclosure for the 2nd time in a month regarding its Gold reserves.  The central bank said it increased its reserves by 1.1% in July to 53.93 million ounces.  That pace of purchases works out to 240 tons per year, well ahead of the pace of 100 tons per year since 2009 as reported last month.

One view is that this could be a new trend toward more “transparency” on China’s part as it pushes for the yuan’s inclusion in the IMF’s currency basket.  Or, alternatively, did China actually lie about the amount of Gold it accumulated between late 2009 and the end of June?  In other words, did they actually gobble up much more than they announced, and will they now make it seem like they’re ramping up their purchases?  This is a communist regime that we simply have little trust in.  Don’t forget, they recently manipulated the Shanghai Composite to 5000, and now they’re manipulating it again to prevent a further breakdown.  The fact of the matter is, they are master manipulators.  Will they produce an even higher Gold accumulation figure for August?

What do you think?  Send us your comments.  What’s clear is that the Chinese have been buying bullion, and lots of it, to back up their currency.

Gold has been consolidating within a downsloping flag for more than 2 years.  Consistently, it has tested the top of that flag (resistance) and the bottom of it (support).  Recently, Gold again touched the bottom of that flag while RSI(14) also landed at previous support going back to the end of 2014.  Just a couple of reasons why commercial traders decided to change their bets while the bearish camp became hugely overcrowded.

For the week, Gold jumped $20 an ounce to finish at $1,014.

Gold 2.5-Year Weekly Chart

Silver soared 43 cents or 3% for its 3rd straight weekly advance, closing at $15.24.  Crude Oil, under continued pressure, fell $1.57 a barrel to $42.18.  Copper shed a penny to $2.33 while the U.S. Dollar Index plunged a full point to 96.57.