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TSX Venture Exchange and Gold

What a week to begin 2016.

North Korea, the loopiest regime in the world, closely followed by Alberta’s whacky NDP, now claims to have a hydrogen bomb.  Saudi Arabia cuts off diplomatic relations with arch-rival Iran as Middle East tensions continue to ratchet up on multiple fronts.  China drops the ball with a silly circuit breaker system (suspended after just 4 days) that any sharp high school student could have told them would never work and would actually have the opposite effect of what was intended, so global markets get pummeled as investors lose more confidence in China’s ability to manage the tricky trio of equity markets, an economic slowdown and the overall transition to a market economy (can’t trust these communists).  President Obama, whose lack of discernment and leadership on the international stage is a major reason why the world has become increasingly chaotic and dangerous (how did he win the Nobel Peace Prize?), believes there’s “no greater threat to the planet than climate change” while he also takes aim at American gun owners instead of focusing on Islamic terrorists and the economy (what a way to build a legacy).  “WHOA!  Job creation surges in December,” the U.S. mainstream media bellows on Friday, forgetting that the headline numbers (292,000 new jobs and a 5% unemployment rate) don’t look so good when the labor force participation rate, near its lowest point since the late 1970’s, actually declines even further on a year-over-year basis while wage growth remains tepid.   In addition, the Labor Department reported huge job growth in November and December of last year (423,000 and 329,000, respectively) before numbers backed off dramatically in early 2015.  Their figures are perhaps only a little more trustworthy than China’s.

After all of the above craziness, and more, including another missing Chinese billionaire, the Dow and S&P 500 each experienced its worst start to any year in history (the S&P lost $1 trillion), European markets suffered their sharpest weekly decline since August 2011, while Crude Oil plunged 10% to a 12-year low.

You’re having some fun, though, if you own at least a few quality Gold stocks in your portfolio.

Gold and Gold stocks (especially producers) bucked the trend last week with the yellow metal climbing back above $1,100 while the TSX Gold Index surged 9.4%.  With the U.S. mainstream media bashing Gold throughout 2015, an historic opportunity likely emerged late last year to accumulate quality Gold stocks at fire sale prices.  At some point in 2016, perhaps sooner than later, this still-unloved sector may really put on a show.

2016 is shaping up to be a volatile year economically and politically around the globe (an ideal environment, by the way, for Donald Trump – the “change” candidate – to defy the skeptics and become the next U.S. President).   Gold stocks could prove to be an island of safety in a massive sea of global risk.

Venture 6-Month Daily Chart

Losing just 2%, the Venture significantly out-performed the broader equity markets for the week as the Dow tumbled nearly 1100 points or 6.2%, the NASDAQ slid 7.2%, while the TSX (supported by rising Gold stocks) lost 4.3%.

All things considered, the Venture held up well last week and staged a normal retrace after 8 consecutive sessions to the upside.  Intra-day on Tuesday, the Index came within 3 points of Fib. resistance at 531 and then proceeded to back off to its EMA(20) at 515.  For the week, the Venture fell 11 points to close at 515 with RSI(14) perhaps finding support at the 50% level.  If an uptrend has any traction to it in the early stages, the short-term moving averages will typically provide support and continue to rise.  That’s something to watch for this coming week.  The Venture’s 20-day SMA, not shown on this chart, is currently 512 and climbing.  Can that continue?

One distinct possibility is that the Index is range-bound up to Fib. level 531 until the 50-day SMA is able to reverse to the upside – that could take another couple of weeks, at least.  Broadly speaking, the Venture’s out-performance vs. most commodities, the CRB Index and the Canadian dollar over the last 3+ months is very encouraging and suggests that the risk-reward ratio in the relatively small universe of high-quality juniors is more attractive now than at any point since late 2013.

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 last summer’s fresh 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 historic 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.

Keep in mind, as well, that in currencies other than the U.S. dollar, Gold has been performing exceedingly well.  So don’t get fooled by the widespread negativity in the American media toward Gold at the moment.  Bullion in Canadian dollars, for example, is in a major bull phase and certain high-quality Canadian Gold producers have given investors tremendous returns over the past year or two – and still represent great value.

U.S. Dollar Index Updated Chart

We still believe the path of least resistance for the Dollar Index this quarter is down, especially after the Fed finally pulled the trigger on a rate hike last month (the dollar ran up for 18 months on that speculation).  Furthermore, the Fed is in a fantasy world if it thinks it can carry out 4 interest rate hikes in 2016, given the Obama economy, global instability and the lessons of recent history:  In the last 7+ years since the world’s central banks responded to the financial crisis by slashing interest rates, more than a dozen banks in the advanced world have tried to raise them again and all have been forced to retreat.

The greenback has shown some resilience over the last several weeks but we rank the odds of a move below 97 higher than a breakout above 100.  A significant consolidation in the Dollar Index is overdue after a record run, and this would be helpful for Gold while giving commodities in general some relief.

Gold

Gold jumped boldly out of the gate to begin 2016 with a gain of $45 or 4.2% last week, slicing through important resistance at $1,080 like a knife through butter.  This doesn’t mean it’s straight up again to begin the 2nd trading week of the year, as some profit-taking and a healthy pullback could easily occur, but the tone for Gold this quarter is very favorable for a variety of factors.

Bullion in 2015 posted its 3rd straight annual loss in U.S. Dollar terms for the first time since 1998.  However, support for the metal is exceptionally strong within 1.5% to 5% of where it closed for 2015 ($1,061), and during Q4 the smart-money commercial traders positioned themselves for a robust rally.  Sell pressure peaked in November while RSI(14) has been in an uptrend since then.

As we maintained late last year, any surprises in Gold are likely to be to the upside in Q1 given the pervasive negative sentiment surrounding the metal.  Physical demand out of China should also be strong this month thanks to the upcoming Chinese New Year – a key driver for Gold’s Love trade – falling on February 8.  And unlike last year at this time, when they were chasing equities, many Chinese investors will likely be more inclined to invest in Gold given how China’s leadership has seriously shaken the confidence of investors throughout the world in that country’s equity markets.

The near-term Fib. levels for Gold are roughly at $10 intervals from $1,110 to $1,130.  Support should hold on any pullback at $1,080, the 50-day SMA and previous Fib. resistance.

Gold 2.5-Year Weekly Chart

This chart from John has been an amazingly accurate guide for the direction of Gold over the past 2+ years.  Each time the yellow metal has hit the bottom of the channel, it has bounced back vigorously which is why we turned bullish on bullion in November and recommended going long on the HGU (double long Gold stock ETF) around $3 ($15 post-consolidation) at the time (it closed Friday at $19.54).

All indicators (RSI-14, SS, ADX) on this chart are well-positioned to support a further climb in Gold, perhaps not immediately but over the next several weeks, to major resistance at $1,150.  Where Gold goes from there is anyone’s guess at this point.  The top of the channel right now is around $1,200, so any breakout above that level would be extremely significant.

Silver didn’t behave as robustly as Gold last week, adding just a dime to $13.93.  Copper fell 9 cents to $2.03 on China growth concerns.  Crude Oil plunged 10% to $33.16 while the U.S. Dollar Index was off slightly at 98.38.

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 3 decades in 2013, and current weakness, the fundamental long-term case for the metal remains solidly intact based on the following factors (not necessarily in order of importance):