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TSX Venture Exchange and Gold

The Venture posted back-to-back session gains Thursday and Friday for just the third time since the beginning of March (we haven’t seen 3 consecutive winning sessions since mid-January), but still finished down a whopping 84 points (8.2%) for the week as it closed at 939 – the first weekly close below the 1000 level in just over 4 years.  The 11th straight weekly drop was due to across-the-board weakness in commodities including a spectacular plunge in the price of Gold which was smacked down into the low $1,300’s before recovering modestly to close Friday at $1,404.

While it’s possible the Venture could rally mildly out of temporarily oversold conditions in the coming days, the fact of the matter is that this Index is still very vulnerable to further declines and at the very least will likely need to test the next significant support level which is around 860. The gains Thursday and Friday were tepid and on light volume. Below is a 13-year monthly chart that puts into proper perspective the severe technical damage that has been inflicted on this market in recent weeks in particular.  Failure to hold above last year’s low of 1154 was a critical breach.  The good news is, eventually (impossible to predict exactly when at this point) there is going to be a buying opportunity of a lifetime in the Venture, or at least a very powerful rally that could be extremely profitable for those investors who are properly positioned at the time.

Gold

Gold got crushed Monday and Tuesday, falling as low as $1,321 an ounce in its most spectacular sell-off in over 3 decades.  A number of factors – technical and fundamental – are contributing to Gold’s weakness at the moment, and the shear power of last week’s drop convinces us there’s more downside action to come.  John’s long-term charts show a serious technical breakdown in Gold and the distinct possibility of an additional drop of more than 20% from current levels (a Fibonacci 50% retracement of the secular trend from the $253 low in 1999 to the $1,924 high in 2011 would take bullion down to $1,088).  For now, Gold has potential to rally into the mid-$1,400’s which would help unwind the temporarily very oversold conditions that emerged early last week.  For those who think $1,321 last week was the bottom for bullion, Gold stocks and the Venture Exchange are saying it wasn’t.  The Venture topped out several months before Gold did in September, 2011, and we’d expect to see the Index bottom out in the same way (ahead of Gold) and begin to out-perform the metal prior to bullion’s next major advance.

Silver fell $2.56 last week to close at $23.29.  Copper was also weak, declining 20 cents to $3.15.  This is the first time since the fourth quarter of 2011 that Copper has closed below $3.20 a pound.  Technically, as John’s chart showed in Thursday’s Morning Musings, there’s more weakness to come in Copper which highlights the fact that deflationary forces are at work in the global economy.  Crude Oil lost ground last week as well, falling $3.28 a barrel to $88.01.  The U.S. Dollar Index, meanwhile, gained two-thirds of a point to close at 82.75.

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.  Despite its current weakness, the fundamental long-term 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, a Fed balance sheet now in excess of $3 trillion and expanding at $85 billion a month, money supply growth around the globe, massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, emerging market growth, geopolitical unrest and conflicts…the list goes on.  However, deflation is prevailing over inflation in the world economy and this had a lot to do with Gold’s recent plunge below the technically and psychologically important $1,500 level. Where and when Gold bottoms out in this cyclical correction is anyone’s guess, but we do expect new all-time highs later in the decade.  There are many reasons to believe that Gold’s long-term bull market is still intact despite a major correction from the 2011 all-time high of just above $1,900 an ounce.