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TSX Venture Exchange and Gold

It was a pivotal week for the CDNX which gained 70 points or 3.4% over the shortened four-day trading period to close at 2101 (it significantly out-performed all the major markets).  This is not a dead-cat bounce.  In fact, for technical reasons we presented last weekend, a major “Wave 4” correction has ended in our view and a potentially powerful “Wave 5” move to the upside, which could last for an extended period, is now underway.  This suggests that Gold will soon take off to new all-time highs and that the CDNX will also be powered higher by companies reporting exciting drill results and fresh discoveries.  Call it an optimistic view if you wish, considering the doom and gloom that is so prevalent at the moment, but history and the technicals are on our side.  June, being the first full month of a market turnaround, could be particularly interesting.  Of course there will be some ups and downs over the balance of the year but history tells us 2465 is not likely the high for 2011.

One of the keys to making big money on the CDNX is understanding that once a year you can count on a major correction of about 20%.  Just like once a year you can count on filing a tax return.  You need to be prepared for both – make money serve you, not the other way around.  In the case of the CDNX, you always want to be in a position when you can really take advantage of these corrections and load up on some of your favorite stocks when the crowd is dumping them.  The last thing you want to do is fall victim to fear and sell everything, particularly near the end of a correction, when you should be doing exactly the opposite.

Below are the last 10 major CDNX corrections (excluding the Crash of 2008) over the last decade:

2011………21% drop over 51 trading sessions from March to May (2465 to 1957)

2010……20% drop over 45 trading sessions from May to July (1688 to 1343)

2009…….No major correction

2008…….19% drop over 14 trading sessions in January (2891 to 2331)

2007…….30% drop over 23 trading sessions from mid-July to mid-August (3342 to 2348)

2007…….19% drop over 31 trading sessions from November to mid-December (3193 to 2580)

2006…….29%  drop over 24 trading sessions in May (3310 to 2352)

2006…….19% drop over 22 trading sessions from September to early October (2819 to 2291)

2005…….22.5% drop over 52 trading sessions from March to May (2050 to 1588)

2004…….19% drop over 31 trading sessions from early April to mid-May (1898 to 1530)

2003…….No major correction

2002…….29% drop over 91 trading sessions from June to mid-October (1256 to 887)

If you were a buyer toward the end of the nine major corrections prior to this year cited above, you likely made A LOT of money.  The CDNX rebounded sharply after each of those corrections.  Excluding the extraordinary fall of 75% over the last half of 2008 (the “Great Crash” which we’ve left out as it was an anomaly, the average percentage decline in the nine major corrections cited above between 2002 and 2010 was 23% over an average of 37 trading sessions.

This year’s correction started March 7 and lasted until May 17 (one could argue there were two separate corrections which makes it less likely we’ll see another major drop later this year) when the CDNX dropped as low as 1957 intra-day.  The magnitude and duration of this drop (20.6% over 51 trading sessions) was very comparable to last year’s and the one in 2005 which also occurred during the months of March, April and May (ironically, the 2005 correction started March 7 and ended May 18 – by the end of June the market was up 9% from its low).  The market gained an average of 55% by the end of the year after the corrections of 2010 and 2005. If we were to have a repeat of that this year, the CDNX would close at 3033 at year-end which incidentally is very close to John’s latest Fibonacci target for the CDNX.

The average gain in the market, measured by the year-end close, after the eight corrections cited above from 2002 through 2010 (excluding 2008) was an impressive 27% which would give us a year-end target of 2485 for the CDNX.  Investors cannot ignore this kind of statistical information over such a lengthy period – in a 30% gain by the CDNX, a good number of stocks will double, triple or even quadruple in value.  There will be some 10-baggers as well.

The best time to be long on the CDNX is when the wind is at your back and that’s exactly the case right now given that a major correction has just ended.  The CDNX’s 20-day moving average (SMA) could reverse to the upside as early as next week, a development that would add fresh fuel to the advance.  The action in certain individual stocks (Canaco Resources being a great example) adds to our confidence that a major upside move is underway in the CDNX.  The 10 and 20-day moving averages should provide strong support on the way up as they have following other major corrections.

Can we be 100% certain the CDNX correction for 2011 is over?  Of course not – something completely bizarre could always happen – but in this business you go on probabilities.  Based on all the technical indicators and historical information we look at, we would be foolish not to conclude this correction is over – the odds are so heavily in favor of that.  We expect a strong market in June, perhaps some consolidation through July and August, and then another push higher over the final four months of the year.  In terms of the fundamentals, Gold is looking exceptionally strong and the commodity “Super Cycle” continues.  The Fed’s accommodating monetary policy is expected to last well into next year.

Gold

Gold broke through resistance at $1,530 Friday, closing at $1,536.50 for a gain of $17 for the day and $23 for the week.  Gold, which in euro terms reached a new all-time high last week, has been finding consistent support at its rising 30-day moving average (SMA) and it seems to have gotten very comfortable with the $1,500 level which is a bullish sign.

Silver powered higher last week, closing at $37.96 for gain of $2.90.

The U.S. Dollar Index declined sharply Friday and was off nearly a point for the week at 74.75.

Utah has now made official the use of Gold and Silver coins as legal tender. This marks the first time since 1971 that any government entity in the United States has legalized the use of Gold and Silver as currency. The law, signed by Governor Gary Herbert, does not require citizens to pay or accept payment in Gold or Silver, but rather offers an alternative to the fiat-based Federal Reserve note. The Utah law will also exempt the sale of Gold and Silver coins from state capital gains taxes.

The Associated Press noted that earlier this month, “Minnesota took a step closer to joining Utah in making Gold and Silver legal tender. A Republican lawmaker there introduced a bill that sets up a special committee to explore the option. North Carolina, Idaho and at least nine other states also have similar bills drafted.”

Investors are closer to being able to use Gold as a trading security after a European parliamentary committee approved a proposal to allow clearing houses to accept Gold as collateral. “It is very significant that the European Parliament is putting its weight behind the argument that the unique characteristics of Gold make it an ideal form of high quality liquid collateral,” said Natalie Dempster, director of government affairs at the World Gold Council (WGC).

Gold demand continues to be strong.  First quarter world Gold demand grew 11% from the same period a year ago to 981.3 metric tons, according to the WGC in its quarterly supply/demand trends report released recently.  Much of the increase was due to investment demand with a 52% jump in purchases of bars and coins more than offsetting a decline in holdings of exchange-traded funds.  Jewelry interest also rose with China and India collectively accounting for nearly two-thirds of the global jewelry demand.

The WGC issued a included a separate section on China in the quarterly supply/demand trends report (data was compiled by the consultancy GFMS).  In the spring of last year the WGC issued a report stating it expected Chinese Gold demand could double over the next decade.  “With the sustained momentum in Chinese Gold demand, this target will probably be achieved in a shorter time scale,” according to Eily Ong, investment research manager with the WGC.  Gold demand grew by a whopping 32% in China last year despite a concurrent 25% rise in the average local currency Gold price.

Demand for Gold in China was so strong during the first quarter that for the first time the country outpaced the combined total of the developed West. If you lump together the Gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries (despite large  increases in demand from France, Germany and Switzerland), the sum of these countries is still outpaced by China.

A slight pullback in prices during the middle of the first quarter and “persistent high inflation levels” pushed China into the position as the world’s largest market for Gold investment. Chinese citizens devoured nearly 91 tons of Gold bars and coins, more than double the amount of a year ago.

This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.

Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation.  Just imagine the total wealth in China and even a small percentage of that choosing to buy Gold. This demand is going to be enormous.”

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, and 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.