CDNX and Gold
The CDNX continues to power higher as it surged past the important 2350 resistance area last week which served as strong technical support on several occasions between 2006 and 2008. The CDNX gained 66 points on heavy volume last week to close at 2424. A major new upleg is clearly underway and with precious metals taking off again and commodities in general in a very robust bull market, it’s not hard to imagine the CDNX taking a run at 3000 within the first three to six months of this year. The masses, still licking their wounds from the 2008 Crash, are still not in this market which tells us there’s much more upside left.
Gold stocks have been the laggards on the CDNX through the first six weeks of 2011 (this incredibly powerful bull market has shown a lot of rotational leadership) but we expect that will change immediately with the yellow metal now back above $1,400 and looking extremely bullish. We see some incredible potential profit opportunities in the weeks and months ahead.
A wave of change in the Middle East has been a key factor in Gold’s recent strength. The yellow metal climbed nearly 3% last week, finally breaking through its 50-day moving average (SMA) and an important area of resistance between $1,370 and $1,380. Today, Gold is up sharply (along with oil prices) and back above $1,400 an ounce while Silver has hit a new 30-year high of $34.
The chaos that has erupted in Libya is of particular importance as it’s the first major oil exporter to be engulfed by the Middle East uprisings and the first to see significant disruption to oil production. The country is one of the world’s biggest oil producers, accounting for around 2% of global daily output, and has the largest proven oil reserves in Africa. Crude oil prices are now above $90 a barrel with a whopping 6% increase today.
The fundamental case for Gold remains so incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an extended period of negative real interest rates (inflation is greater than the nominal interest rate, even in China and India despite increasing rates there), 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 (with the volatile Middle East being the focus right now)…the list goes on. It’s hard to imagine Gold not performing well in this environment. New all-time high prices are likely just around the corner and John will be providing us with an updated chart later today.
The World Gold Council (WGC) confirmed last week that 2010 was an incredible year for Gold. Overall demand grew by 9% to reach a 10-year high. Demand for jewelry was the biggest contributor, accounting for 54% of the total. The chart below shows the huge increase in jewelry demand coming from India, Hong Kong, China and Russia – they all love Gold. And the higher Gold goes, the more they love it.
Overall, jewelry demand increased 17% in 2010 despite significantly higher prices in many currencies. Interestingly, Gold demand for technology increased 12%. Surprisingly, investment demand declined 2% as investment in Gold ETFs fell 45%. Even with the drop, however, 2010 was the second-highest year on record in terms of investment demand for Gold.
China’s appetite for Gold remains very strong. The WGC says the country consumed 175.2 tons of Gold in the 4th quarter of 2010, bringing its grand total for the year to 579.5 tons or 18.5 million ounces. By comparison, the U.S. bought 203.3 tons last year. It appears China is trying to legitimize its currency by ramping up its Gold holdings. Aggressive buying of Gold and Silver by China’s central bank is generating a lot of interesting and controversial theories. And of course individual citizens are also buying large quantities of Gold.
The rise in Chinese Gold demand also goes hand-in-hand with a rise in average incomes for Chinese citizens. Last year, 20 million migrant workers in China saw their incomes rise 24 percent. Compare this to the U.S. where the job market has shown some signs of life but continues to sputter.
With these higher income levels, many in China’s middle class are looking to Gold as a means for long-term savings and a possible hedge against inflation. The success of the WGC’s Gold accumulation plan is an example. It allows Chinese consumers to purchase small amounts of Gold on a routine basis to build a portfolio.
