TSX Venture Exchange and Gold
It was a strong week for the CDNX and markets in general as investors drew encouragement from better-than-expected economic data out of the United States and apparent progress in tackling the euro zone debt crisis, though the European problem is really far from being solved and can be expected to haunt the markets for many more months.
Before investors get too excited about the CDNX’s 25% jump since the 1306 low October 4, some important points need to be made. First, the primary trend continues to be down given declining major moving averages (50, 100, 200-day SMA’s) that are not about to reverse to the upside anytime soon. In fact, it’s hard to imagine the important 300-day SMA not reversing to the downside by year-end which would be a very negative development. As John’s updated 2.5-year weekly CDNX chart shows below, this Index has a lot of heavy lifting to do and it’s currently trading within a strong resistance band between 1600 and 1700.
For the week the CDNX gained 97 points or 6.3% to close Friday at 1630, exactly at its declining 50-day SMA. Short-term (14-day) technical indicators such as Stochastics and the Chaikin Money Flow (CMF) are showing overbought conditions similar to the July and April rally highs, and volume during this 324-point advance has been unimpressive. That’s not a good sign as it shows a lack of conviction in the market that this move can be sustained or that it marks the beginning of a new bull phase.
It’s also important to stress that unlike the true market reversals following the 2008 Crash and in the summer of last year, the CDNX did not lead the major indexes higher this time around. The CDNX was the first market to break down prior to the ’08 Crash, it was the first market to break out after the Crash and it also led the markets out of the 2010 correction into a major bull phase that finally ended in the spring of this year. It is an extremely reliable leading indicator. The CDNX topped out in early March, a couple of months ahead of the Dow and even the Nasdaq. The CDNX has made it very clear in recent months that we’re now in a bear market but most investors haven’t recognized or accepted that yet. The Dow led the markets out of the October 4 lows and the CDNX followed along for the ride.
Bottom line: Odds are heavily stacked against investors making money by buying into this rally. Experienced traders, in fact, should be giving serious consideration to short TSX ETF’s such as the HIX (single leverage) and HXD (double leverage). We’ll be posting a chart on the HIX later today as it has touched important support.
Below is John’s updated CDNX chart.
Gold
Gold enjoyed a strong week and finally blasted through resistance around $1,685. The yellow metal closed Friday at $1,743, a gain of $101 for the week. Below is John’s updated Gold chart which shows some consolidation is now likely prior to any push through resistance around $1,750. The overall trend remains very bullish.
For the week, Silver jumped $3.89 to $35.29, Copper climbed 44 cents to $3.67, Crude Oil shot $5.92 higher to $93.32 while the U.S. Dollar Index fell over a point to 75.09.
The “Big Picture” View Of Gold
As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being 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, is having a huge impact on Gold.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, governments and world leaders in general, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on. It’s hard to imagine Gold not performing well in this environment. The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.
What’s also driving Gold is the weakness of the United States, brought on in no small part by one of the most ineffectual Presidents the nation has ever been saddled with. America has lost its way and the recent S&P downgrade is both a real and a symbolic reflection of that. Since the summer of 2009, the U.S. economy has produced a net total of just two million jobs while federal spending has gone through the roof. Throughout its incredible history, the United States has demonstrated an amazing resiliency and the ability to bounce back from major economic, social and political troubles. It will do so again but this will take time and a real Commander-in-Chief in the White House by November, 2012. By then Gold will have climbed another 50% or more.
I don’t think you guys are thorough enough in your analysis of the factors driving this bull run in precious metals. What we are witnessing is not just “currency instability” but an actual race to the bottom with all fiat currencies which will end up in massive debasement in the value of all fiat currencies. This is not the 1970″s and there is no Paul Volker to come in on his white horse and save the paper currencies and put precious metals back in their place. This time it is too late for our current crop of paper currencies because we are now in the stage of complete debt saturation at every level of society including the sovereign level. There will be no solution to this problem as the only solution is a return to commodity based money and the central bankers and their political cronies won’t allow that. Nevertheless it will happen but probably not until this bunch of paper currencies have destroyed themselves. Where this leaves junior miners and explorers nobody knows but I would rather put a small portion of my assets in companies with real money in the ground than any of the corrupt, bankrupt financial institutions. Are you guys going to change your name to Bear Market Run to reflect your new attitude as your analysis seems to imply this.? This is not in any way a criticism as I always enjoy your views and it has been a tough year for all investors in juniors.
Comment by Patrick — October 30, 2011 @ 12:30 pm
“Bear Market Stand” perhaps LOL …The key is why aren’t the metal juniors moving with their primary commodity as they did in the past . When will this disconnect end and the little juniors move up . We must be due for that process to begin with the bottoming of the Venture now happening .
Comment by Frank Speaker — October 30, 2011 @ 4:57 pm
Patrick: Gold is a vehicle to make money with and nothing more. Ask professional geologists and they will tell you that since man has been on the planet about 170,000 tons of gold has ever been mined in its entirety.It all would fit in on average sized office building or two or three floors. It would take almost twice that to pay the debt of the US. Do the math. Now taking that further , IF the dollar had been backed by gold all along much of what you see out your window would not exist as there isn’t enough gold on the planet to back the dollar let alone back anyone elses currency.So look at all that was accomplished with “fiat” money. Now tell me also if gold would suddenly disappear from the planet HOW negatively would man be impaired? I can’t think of anything other than trading the metal or wearing it that man would miss. Then tell me about copper, or aluminum with the same scenario.
Comment by MJJP — October 30, 2011 @ 5:47 pm
Hi Mjjp; The point you make is a common one and is touted about by lots of modern economists. The key to this question is not the amount of gold but the price of this gold in relation to the rapidly depreciating paper currencies. If the gold price were to match the M2 money supply like it did at Bretton Woods it would take a gold price of roughly $10,000 per oz to achieve this. If it were to match the M3 supply which includes credit card currency, which in our society is very real currency, it would take a gold price of roughly $20,000 per oz to match this. These are the type of figures gold would have to be revalued to to back the current currencies. The figures are even higher in other currencies like Sterling. You seem to think that an elastic money supply has posesses some benefits that a finite commodity backed money does not. This is also a common misconception touted by our modern monetary wizards. Elastic currency supply causes inflation and the asset bubbles which have been such a feature of modern economies since we came off the classical gold standard in 1913. The technological innovations that were achieved using a finite money supply were as spectacular in their day as the ones we have witnessed in the last 100 years. The main difference was that people with savings and on fixed incomes were not constantly robbed by the ravages of inflation and asset bubbles. The CPI in London remained at 100 between 1713 -1913 which shows how steady prices were for this period. Savers got the benefit of a very mild constant deflation of 1-2% which reflected the technological advances of the day. In the following 60 years from 1913 the CPI increased by 2000%. This is no coincidence and shows that inflation is always a monetary phenomenon and is always caused by an increase in the currency supply. It now costs 272 base metal pounds to buy one of the 1913 gold pounds. In short my point is that elastic paper money currencies offer no benefits to ordinary people, only to bankers and politicians. We will see a return to a sound money system although I am afraid it is going to take a complete breakdown of these modern currencies before it happens. Maybe Ron Paul will be elected and he will introduce competing currencies and give people a choice between unbacked paper and sound money. I certainly hope so but I very much doubt it.
Comment by Patrick — October 31, 2011 @ 3:57 am
Patrick: I think your first half of your response only confirms what I have said. There isn’t enough gold on the planet to do what we have done and promise to do. As you correctly point out the need to revalue an once of gold to ridiclous prices to achieve this. Basically what you want to do is control the money supply using gold . If we truly do this , if we had done this, much of what you see would not have happened or exist. Much of what is planned would not occur because there is not enough money in the game to play. The game of Monopoly is what you would have in real life in which only a set amount of money is on the table . The population of the planet is increasing rapidly and in order for them to play, money must come from somewhere . Why is it OK to honor money that one digs up or artificially pegs to its’ value and not OK to issue money as needed and removed in like fashion? I really think the biggest problem our economy has at present is that much of the paper is being hoarded by not only banks but corporations as well. It is not circulating in the economy. Another fallacy I might point out in your observations is that in those older economies much of the money stayed in the countries. I doubt very much meaningful trade occurred among the citizens and the outside. Today with global trade currencies cross borders like the wind back and forth.
Comment by MJJP — November 2, 2011 @ 8:34 am