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TSX Venture Exchange and Gold & Silver

Not surprisingly, given short-term overbought technical conditions, the Venture Exchange staged a mini-correction last week but the pullback was confined to just a three-day period.  The Index fell 52 points or 3.9% from Monday to Wednesday’s intra-day low and then rebounded sharply to close the week at 1335, a loss of just 11 points from the previous Friday.  Last weekend we wrote, “A move down to one or both of these SMA’s (10 and 20-day moving averages) would be a healthy development that would lay the groundwork for the next surge.”  Indeed, the Venture tested its 20-day SMA just below 1300 and then headed higher again.  The next major test for the Index it to push through a resistance band between 1350 and 1365.  Thanks to the cleansing of the recent overbought condition, the Venture is better positioned now and likely has the energy to get through that resistance in the coming week.  The RSI(14) in John’s 6-month daily chart below has unwound from an overbought level and is now climbing again, while other indicators including buying pressure are very encouraging.

Four other very important factors have us convinced the Venture is gearing up for what has the potential to be a very strong fourth quarter and a spectacular start to 2013:

1. The Index has broken out relative to the U.S. dollar, ending a decline that started in the spring of 2011.  There is a strong inverse relationship between the Venture and the greenback, and the current state of the U.S. dollar (technically and fundamentally) is very weak given QE3 (QE Infinity) and the growing probability of another four years of Barack Obama in the White House and a possible Democratic sweep in November’s elections.  Ben Bernanke’s job is safe as Federal Reserve Chairman and the Americans won’t seriously deal with their debt issue until another major financial crisis forces them to;

2. Over the past couple of months the Venture has been outperforming the broader equity markets – this is another important change in trend and reflects a more “risk-on” environment;

3. The Venture’s 1,000-day moving average (SMA) has flattened out and is ready to move higher – this ends a four-year decline and suggests we’re now in the very early stages of a new bull market;

4. Commodities, in particular Gold and Silver, are going much higher for technical and fundamental reasons.

Gold

Gold traded in about a $50 range last week, falling as low as $1,735 (just above very strong support at $1,730) and as high as $1,785 where there is obviously some resistance.  For the week, bullion settled at $1,771 for a loss of just $2 an ounce.  Short-term overbought technical conditions have unwound which makes a near-term breakout through $1,785 increasingly likely.  Below is a 6-month daily Gold chart update from John.

Some interesting comments on Gold from respected Credit Suisse analyst Tom Kendall:

“The one part of the puzzle that’s still largely absent is a stronger pick up in Indian demand.  We’ve seen a bit of an upturn as the rupee has strengthened, but we’re still waiting for that market to come back into Gold in more sizable volume.”

“The Gold market has already come up 12% since mid-August, so that’s a pretty good rate of return over six weeks or so.  It’s natural to expect some consolidation before it pushes up through $1,800.  But the pull is definitely to the upside now.”

Credit-rating agency Egan-Jones had this to say last week:

“The FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the U.S. economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the U.S., but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, Gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power.”

Silver was relatively unchanged for the week, closing at $34.49.  Copper fell 2 pennies to $3.74.  Crude Oil was off nearly $1 a barrel to $92.19 while the U.S. Dollar Index rallied half a point to 79.89.

John will update his long-term Silver chart, with a Fibonacci target level of $78, as part of tomorrow’s Morning Musings.

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.  QE3 has arrived, and massive central bank intervention is now taking place 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.