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TSX Venture Exchange and Gold

The CDNX ended an 8-week slide that has the signature of a classic major correction bottom marked by extreme levels of pessimism.  Last Monday, when all markets plunged, we speculated in a special mid-day chart that the “capitulation moment” may have arrived, and indeed it did.  The CDNX hit a low of 1363 – a 333-point or 20% pullback from the February 29 2012 high of 1696 – and successfully re-tested that level over the next couple of days before taking off to the upside. Still, some investors panicked last week and likely threw some stocks overboard at precisely the wrong time – what a shame.

This does not have the feel of a mere bounce out of oversold conditions.  Iamgold’s (IMG, TSX) takeover of Trelawney (TRR, TSX-V), announced Friday morning, could be just the beginning of a series of takeovers as majors – many of them sitting on record amounts of cash – scramble to add ounces to the ground and scoop up undervalued juniors.  This will help put a “floor” under the CDNX and, combined with some good discoveries and the strong potential for rising Gold and Silver prices, this market could really light up through the remainder of the year – the final six months, in particular, we believe, could be quite explosive.

Historically, the CDNX in 2012 is so far following the 2005 pattern when the Index moved strongly higher during January and February, corrected sharply (22%) from early March to mid-May, and then powered higher (a 40% move) through the remainder of the year.

On the exploration front, some success stories are starting to emerge.  On Thursday, Gold Standard Ventures (GV, TSX-V), a company we put on our “Watch” list a couple of months ago, reported two stellar holes from its Railroad Project in Nevada.  Drill hole 12-1 cut 164 metres grading 3.38 g/t Au while the second one, about 100 metres to the south, graded 4.29 g/t au over 56 metres.  GV jumped nearly 60%, hitting a high of $2.80, and closed the week at $2.74.  This is great news for the market and more outstanding results like those from other companies will bring a lot of confidence and spark back into the Venture Exchange.

The CDNX finished the week up 15 points, on rising volume each day, to close at 1412.  It has broken above its 10-day moving average (SMA) which has provided stiff resistance since early March.  Look for the 10-day SMA to reverse to the upside by the end of the coming week which will add more fuel to the fire.  There are also several more important technical indicators that are flashing “bullish” at the moment as John details below:

Gold

Gold had an encouraging week, testing strong support once again in the low $1,600’s and then strengthening to close Friday at $1,663 for a weekly gain of $4.  As John’s chart shows, the yellow metal is now at a critical point where it could soon bust loose and turn sharply higher:

As we mentioned in yesterday’s Morning Musings, a reverse head-and-shoulders pattern is quite obvious on the Gold chart as John has been pointing out in recent weeks.  Going back over the last decade, Gold has also consistently found support at its 300-day moving average (SMA) which also happens to be the right shoulder low.  Gold‘s March-April swoon could indeed be over, and the oversold Gold stocks, which almost seem to have been factoring in a major breakdown in the Gold price, could be in for a spectacular rise as the year progresses.

The rate-setting Federal Open Market Committee (FMOC) left benchmark borrowing costs unchanged Wednesday but chairman Ben Bernanke said economic conditions were likely to warrant exceptionally low interest rates until at least late 2014 – bullish for Gold.  He added at a news conference that the Fed believed monetary policy was “in the right place, but being in the right place doesn’t mean we won’t take further action.”   So Bernanke is keeping all options open for possible additional stimulus which should help keep a solid floor under the Gold price.  The $1,600 area has held up extremely well as support.  Barclays Capital said in a note to clients: “Policy accommodation remains in place and will continue to support higher-beta risky assets.”

Silver for the week was off 43 cents, closing at $31.27.  Copper, thanks in part to tight supplies, has hit a three-week high and finished Friday at $3.86 (John will have an updated Copper chart Monday morning).  Crude Oil climbed $2.10 to $104.93 while the struggling U.S. Dollar Index fell to 78.71.

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 that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), money supply growth, 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.