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TSX Venture Exchange and Gold

The Venture Exchange rebounded sharply last week and dramatically outperformed the major indexes with a 7% gain (the TSX climbed 3%, the Nasdaq was up 2% while the Dow eked out just a 1% gain).  The Venture, which fell 28% over 55 trading sessions from its February 29 yearly high of 1696 to a low of 1215 May 16, may now be ready to pull off a 2005-style advance through the remainder of the year after a major spring correction.  That remains to be seen; however, the catalyst for that would be central banks firing up the printing presses which seems to be a growing possibility given the situation in Europe and a slowing global economy.   The Fed and the ECB could very easily ignite a “risk-on” trade in the very near future aimed at restoring confidence in the euro zone and kick-starting the global economy.  China is ready to take additional  monetary and fiscal measures as well to avoid a hard landing.

So while we’re not quite ready to proclaim that May 16 was indeed the bottom of a nasty correction, the picture is nonetheless looking considerably brighter for the beaten-down Venture Exchange.  Last Wednesday’s trading was particularly encouraging and revealing as sharp intra-day bull hammer reversals occurred in Gold and Silver stocks (TSX Gold Index and the Venture) while the underlying metals were still down significantly for the day, though they were quick to follow.  It was the type of trading activity that one normally sees at major reversal points.  There was also follow-through on Thursday and Friday.

Volume levels for the Venture are still relatively low and need to increase, though this didn’t stop GoldQuest Mining (GQC, TSX-V) from trading a whopping 25 million shares on the Venture Thursday and Friday after reporting a major discovery at its Las Tres Palmas Project in the Dominican Republic.  More discoveries like this will rekindle interest in the CDNX and provide the necessary fuel for this market to move significantly higher.

The Yukon, of course, is an area to certainly watch closely.  Natural Resources Canada recently estimated that $300 million would go into mineral exploration in the Yukon this year, just a little less than the $307 million last year.  There are some outstanding companies with an excellent chance of exploration success in the Yukon this summer.  The western U.S. is also hot, and we’re also convinced that the West Kootenay region will become a major focus of attention this summer with the work that Rainbow Resources (RBW, TSX-V) and some other companies are doing there.  Geologically, this area is mineral-rich but has been heavily under-explored.  In our view it’s not a question of “if” but only “when” a new discovery will be made in this region.  Rainbow‘s ground covers 130 square kilometres; prospecting is underway and the start of a major drill program is imminent.

Below is John’s updated chart for the CDNX. As he states, “It has been a long time since the Index appeared this strong”.  Notice how the RSI(14) on this 6-month daily chart is now up against resistance – what we’ll be looking for this coming week is a break above that RSI resistance level, as well as increasing volume, to provide additional evidence that this market has indeed “turned the corner”.

Gold

Gold had a strong finish to the week, climbing $16 an ounce Friday to close at $1,574.  Overall, the yellow metal was still down for the week but the trading action was encouraging.  Wednesday’s activity in particular carried a lot of potential significance.  The first major resistance Gold needs to crack is $1,600, and another test of that level seems likely this coming week. Ultimately, Gold needs to overcome its down trendline as shown below and then expectations will build for a run to a new all-time high.

Silver, which has held important support levels, also had a strong finish to the week and closed at $28.53 Friday (down 19 cents for the week).  Copper was relatively unchanged for the week, down just a penny, while Crude Oil lost another 62 cents to $90.86.  The surging U.S. Dollar Index broke through resistance at 81.78 and closed up more than a point for the week at 82.39.  The greenback is heavily overbought due to the euro zone situation, and a correction can’t be far off which would be bullish for the equity markets and Gold.

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.  Massive central bank intervention appears increasingly likely to prevent a breakup of the euro zone and to kick-start the global economy.  It’s hard to imagine Gold not performing well in this environment.