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TSX Venture Exchange and Gold

The Venture Exchange (CDNX) was off 16 points this week to close at 2298.  It finished a volatile month of March down 96 points or 4%, its worst monthly performance since June of last year.  But the CDNX managed to stage an impressive recovery from a mid-month low of 2054 after a wild 17% plunge over just seven sessions.

The question on our readers’ minds is, what’s in store for April?  We’ve been cautious regarding the CDNX on a short-term basis since March 10 when the Index dropped below important support and then proceeded to fall another 8% to the March 15 low of 2054.  Trading volumes have dropped off considerably and other indicators have suggested the possibility of a “3-wave” correction.  On the other hand, the CDNX displayed impressive resilience early last week in the face of a drop below 2300 and some weakness in Gold.  We remain cautious.  Downside risks still exist but a case can now be made that the near-term picture has improved somewhat.

The coming week should be extremely interesting.  There is a band of resistance on the CDNX between 2300 and 2330.  A close above 2330 (which would also put the Venture above its 40, 50 and 60-day moving averages) on strong volume would be an immediate buy signal.  If that should occur, then what we should expect is an imminent re-test of the March 7 high of 2465.  Something else to watch out for next week, likely toward the latter part of the week, is a possible reversal to the upside in the 20-day SMA.  That would be a significant bullish development and would draw in more speculators.

John’s updated CDNX chart shows a market looking for near-term direction:

The CDNX took a much-needed breather in the first quarter of 2011, gaining just 8 points or one-third of 1%, after a blistering 34% advance during the fourth quarter of 2010 and a 6% increase during the second quarter.  The CDNX, however, managed to outperform the TSX Gold Index which declined 5%.  The Dow gained more than 6%, its best quarter since 1999, the Nasdaq climbed 4.8% while the TSX was ahead 5%.

Despite the flat performance of the CDNX during the first quarter, there were still good opportunities to make money in select situations.  A rising tide to the extent that we saw in the fourth quarter is not a common occurrence and lifts virtually all boats.  While we’re still in the early stages of what we believe is a multi-year CDNX bull market, it’s important right now to focus on companies with strong balance sheets, healthy stock charts, smart management and exciting properties with excellent potential to produce significant discoveries.  We added a new company to the BMR model portfolio Friday (Visible Gold Mines, VGD, TSX-V) that possesses all of those key ingredients.

Gold fell as low as $1,412 Friday after the release of a stronger than expected U.S. jobs report but rebounded strongly to finish the day at $1,429 for a loss of just $1 for the week.  Silver continues to perform exceptionally well and gained another 55 cents last week to close at $37.83.

Gold rose 1.3% in the first quarter, its 10th consecutive positive quarter, though that was rather unimpressive considering the weakness in the U.S. Dollar and the multitude of uncertainties the world had to deal with from the ongoing unrest in the Middle East and North Africa to the disaster in Japan.

The fundamental case for Gold, however, remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in pats of the world where rates are increasing), 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, rising oil prices…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.

For those pundits who mistakenly claim that Gold is in a “bubble”, its interesting to note that Gold ownership as a percentage of global financial assets is only 0.7% vs. 0.2% in 2002 at the beginning of the current bull cycle (a majority of that increase has been fueled by Gold’s sharp price appreciation).

As an asset class, Gold is still very much under-owned. And the “masses” still haven’t piled into Gold stocks.  We’re not even close to a bubble in Gold.

All eyes will be on the Federal Reserve later this month when Ben Bernanke holds a first-ever media briefing after the April 27 FOMC meeting.  There’s no question the U.S. economy is picking up steam as demonstrated by Friday’s jobs report.  “We’re at a point where productivity is maxed out, so job growth is going to come,” stated James McNerney, chief executive officer of Boeing Co., at a recent conference in Washington, DC, hosted by the Export-Import Bank.  McNerney said Boeing, the world’s second-biggest plane maker, will add 3,000 jobs this year to “fund demand”.  So with the U.S. employment picture brightening, is the Fed’s easing cycle about to come to an end?  We’ll have to wait until April 27 to get some answers but there are still significant risks to the economy including troubling high levels of debt at every level of government, a housing market that is still very weak (one in four mortgages are underwater and prices continue to decline in many areas) and now an increase in oil prices which has the potential of hitting consumers hard.  Interest rate increases in the U.S. appear to be out of the question until at least sometime next year though the Fed may elect to end its asset-purchase program in June as scheduled.  While the Fed may have been successful in slaying the deflation dragon, the economic recovery is still somewhat fragile.  Wage pressure, a critical component of inflation, has also not yet shown up in the U.S. economy with the latest statistics showing that annual wage growth is running at just 1.7%. Bernanke is walking a tightrope.  We do know he prefers a weak U.S. Dollar and we believe it’s safe to assume he doesn’t want to do or say anything that would precipitate a major drop in the markets.

GFMS, one of the world’s foremost metals consultancy firms, has reiterated its bullish outlook on Gold due to numerous economic and political factors. GFMS sees Gold trading as high as $1,600 this year.  The firm says their outlook depends on how major economies of the world grow and how governments of major economies attempt to maintain this growth.

Late Breaking News…China’s Minmetals Resources Ltd. has launched a hostile bid for Equinox Resources (EQN, TSX) of $7.00 per share (the stock closed Friday at $5.71).  The bid is being financed through a mix of cash reserves, long-term credit facilities offered by Chinese banks and equity investments from Chinese companies.