TSX Venture Exchange and Gold
It was a very rough week for commodities which took its toll on the CDNX. The Venture Exchange plunged 9% over a four-day period to 2045, 8 points below the March 15 low, before rebounding 41 points Friday to close the week down 163 points or 7.2% at 2089. Thursday’s 78-point sell-off had all the markings of an important bottom (a short-term low at least) as RSI readings hit extreme levels. The market found support right around the March low and just above its rising 200-day moving average (SMA).
We have to remember the CDNX has had a spectacular run since the late 2008 low of just under 700. The Index has tripled in value in only 29 months, so the kind of trading action we’ve seen over the last few months should be viewed as normal. The sky is not falling and some excellent opportunities have opened up for skilled traders as well as patient investors who have the long-term in mind. For now we’re dealing with a market that appears to be range bound between its 200-day SMA and the 2200 to 2300 area (the 50 and 100-day SMA’s have converged at 2280).
Given the fact the CDNX remains in an overall bull market, underpinned by rising 200, 300 and 500-day moving averages, the sell-off in commodities last week has to be viewed in the context of an overdue and healthy correction as opposed to a fundamental shift. The masses have not yet jumped into the CDNX – that moment is yet to come.
Gold dropped $70 or 4.5% for the week but that was a tea party compared to the bloodbath longs were subject to in Silver. The “poor man’s Gold” had become hugely overbought and several factors contributed to a spectacular 26% drop for the week from $47.94 to Friday’s close of $35.62. It was a “Commodities Smackdow” right across the board as crude oil, copper, nickel, lead, aluminum, sugar and tin were also down significantly.
The heavily oversold U.S. Dollar finally woke up and gained some traction, especially after the president of the European Central Bank dashed expectations Thursday that another rate hike from the ECB was imminent.
The possibility of slower growth in emerging markets such as China and India seemed to weigh on investors’ minds last week which contributed to the sell-off in commodities. This has been an on-again, off-again concern due to continued monetary tightening in those countries in order to tame inflationary pressures (India raised interest rates by a greater than expected 50 basis points, the ninth hike in just over a year).
Gold found support at its rising 50-day SMA of $1,456 and rallied $22 an ounce Friday on a strong U.S. jobs report to close the week at $1,495. Gold was also in technically overbought conditions entering last week though it certainly wasn’t in an extreme “frothy” state like Silver.
The outlook for the yellow metal continues to be very positive but for the time being it’s likely to trade within a “distribution box” as John outlines below.
The fundamental case for Gold 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 parts 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, inflation concerns…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.
Mexico massively ramped up its Gold reserves in the first quarter of this year, buying over $4 billion of bullion as emerging economies continue to move away from the U.S. Dollar. This was the third biggest off-market purchase of Gold by any country over the past decade, and Mexico’s reserves went from just 6.84 tons at the end of January to 100.15 tons, or 3.22 million ounces, by the end of March.
The International Monetary Fund also reported that Russia and Thailand purchased 18.8 and 9.3 tons to bring their respective totals to 811.1 and 108.9. The Gold purchases by Mexico, Russia, and Thailand are consistent with a change that occurred in 2010 in which central banks became net buyers of Gold rather than net sellers for the first time in nearly two decades. This change in trend is one of many reasons we believe Gold is ultimately headed well beyond $2,000 an ounce.
