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TSX Venture Exchange, Gold & General Weekly Roundup

Both Gold and crude oil slipped significantly last week but the CDNX actually posted a small gain of 7 points to finish the week at 1905, the first weekly advance in a month.  The Index fell to a yearly low of 1882 last Monday, slightly below its rising 300-day moving average (SMA) and the November 2010 bottom, before rebounding sharply Tuesday and Wednesday.  It managed to close above 1900 Thursday and Friday despite some renewed selling pressure due to the drop in precious metals and crude oil (interestingly, the TSX Gold Index also climbed last week, 1.4%, despite the $38 or 2.5% drop in Gold).

It’s still too early to tell whether the CDNX has finally bottomed out at 1882.  However, based on all the technical and fundamental evidence that we’ve examined, our stance is that the second half of this year is likely to be much better than the first half.  What we’ve witnessed since early March is a normal CDNX correction (24% so far from the March 7 high of 2465 to the June 20 low of 1882) within an ongoing bull market (or, if you wish, two significant corrections back-to-back).  At the moment the CDNX is either in the final wave of a 5-wave motive phase, suggesting there could be still be some additional weakness and perhaps one last plunge marking a capitulation, or we’re at the very beginning of a new uptrend with the 1900 area turning out to be The Great Wall of Support like 2300-2400 was for two-and-a-half years from early 2006 through mid-2008.

As summer progresses, particularly by August, we’re expecting plenty of good exploration news from many companies (perhaps even a major discovery or two which would really help to ignite the market) and Gold should start to kick into high gear by later this summer as it traditionally does.

As readers know, the CDNX can be extremely volatile.  As an investor, how you respond to that volatility and manage it is critical.  Many people, guided by their emotions and driven by greed or fear, panic the wrong way in both directions.  Do yourself a favor and save yourself some money – don’t panic and start throwing stocks overboard if the CDNX were to drop by another 100 points or more.  It may happen and it may not, but be prepared for it and take advantage of it if such an event were to occur.

We’re encouraged by the fact that major CDNX market bottoms in 2002, 2003, 2004, 2005, 2006, 2007 and 2010 (seven of the last nine years – there was no major correction in 2009) – all occurred after the CDNX fell just marginally below its 300-day SMA, typically by no more than about 6% (2007 was the only exception when the Index suddenly plummeted more than 15% below its 300-day and then quickly jumped more than 30%).

Last year, of course, the CDNX traded slightly below its 300-day SMA for a brief period before bottoming out at 1343 in early July.  It then gained a staggering 84% (1122 points) over the next eight months.  Approximately half of those gains have been erased which has to be interpreted as a very normal pullback.  With rising 200, 300 and 500-day moving averages, this long-term bull market remains intact.

Investors should be prepared, however, for the possibility of one final shakeout in this market which, should it even occur, could send the CDNX down as much as another 10% before a bottom is finally put in.  The Fibonacci 38.2% level is 1782 as John pointed out last week.  This is also just above a trend line on a linear chart (as opposed to a logarithmic chart) from the 2008 low, and slightly below the 1000 day SMA which continues to decline and is currently at 1792.    In addition, it’s important to point out that the 500-day SMA has provided impeccable support throughout CDNX bull markets over the last decade when this SMA has been rising as it is now (and there’s no danger of it rolling over).  The 500-day is currently at 1719, so that’s our “line in the sand”.  It’s possible that level could be hit on an intra-day basis during a capitulation move that marks a bottom in the market.

Given the fact the CDNX has gained an average of 27% by the end of the year from the low of every major correction over the last decade, there’s a strong probability based on historical evidence that by the final trading day of this year (December 30) the CDNX is going to be sitting somewhere between 2159 and 2390 (1700 approx. + 27% and 1882 + 27%).  From the current level of 1905, that would represent a gain of anywhere from 13% to 25% (of course the gain could be higher at some point prior to the end of the year).

Our “big picture” outlook for the CDNX, therefore, is very bullish.  It’s almost impossible to get in at the very bottom of the market or to get out at the very top, but you’ll do well if you can be within 10% of either.  There are many quality junior exploration companies whose shares are worth accumulating at the moment for investors who have more than a 72-hour time horizon, stocks that will perform very well in a 13-25%+ advance by the CDNX over a 6-month period.  Longer term, we see this Index hitting new all-time highs.

Major Developments On The Economic Front

The “big picture” theme of the week, of critical importance to investors, was the clear indication of a coordinated global effort to jump-start the economy.

Make no mistake, President Obama decided to use the Strategic Petroleum Reserves (SPR) as an economic lever (an article in the Financial Times gave ample evidence that Obama’s fingerprints were all over that plan).  For only the third time in history, the International Energy Agency (IEA) and the U.S. Department of Energy (DOE) chose to release oil (60 million barrels or 2 million barrels a day for one month beginning July 1) from the strategic reserves around the globe (according to Barclays, the U.S. holds 56% of these reserves, Japan 24%, Europe 14% and South Korea 6%).  This was not only a clear reminder of how regulators or governments can very easily create downside risks in markets, but it was an obvious attempt – and a successful one – to knock down prices with an increase in supply.  Crude oil fell by over 4% Thursday, below important technical support at $95, after the decision was announced.  The failure of OPEC to come to an agreement on an increase in production at its June 8 meeting, thanks to stiff opposition from Iran, Venezuela and Algeria, gave a sense of urgency to the White House and others, though the plan to release some of the strategic reserves was hatched as soon as the crisis in Libya started.  Libyan oil production has collapsed from a pre-crisis level of 1.6 million barrels a day to just 200,000 barrels (Libya also produces one of the most sought after crude oils in the world due to its low sulphur content).

Additional interventions by the IEA and the DOE should be expected (they are still at approximately 96% of capacity) as it seems clear that major countries, led by the United States, are determined to put a lid (temporarily at least) on oil prices and keep them within a range (say, in the $80’s to low $90’s) that will help boost economic growth.  Consider this to be Obama’s version of “Quantitative Easing”. Oil is now down 20% from its April 29 peak.  It’s estimated that a drop in oil prices into the $80’s could be worth as much as an extra half point for GDP growth in the United States over the second half of the year.

The problem with using oil as a short-term tool for immediate economic stimulus is that the strategy dismisses likely long-term consequences and it also fails to take into account The Law Of Unintended Consequences.    Politicians, especially ones who are trying desperately to get re-elected such as Obama, have a tendency to be very short-sighted with their policy decisions.  There will be consequences down the road, likely in the form of even higher oil prices and higher inflation, from this kind of unprecedented market intervention (strategic reserves were supposed to be for “emergency use only”).  Governments always find a way to screw things up which is why the U.S. and many other countries are in such a fiscal mess.  Obama’s downfall is that he sees government as the solution, not the problem (Obamacare is a typical example and it has brought uncertainty and higher costs to businesses of all sizes which in turn is not good for the economy/employment growth).

There are long-term structural supply-demand dynamics at play in the oil market which will ultimately take prices much higher in our view.  Saudi production (reserves are gradually depleting) remains below peak 2008 levels despite global demand reaching new highs.  China, for example, reported last month that its oil demand is up 9% year-over-year.  That demand will only increase with lower prices.  Demand from other emerging countries is also very strong.

Meanwhile, there was an all-out effort by the European Union last week  to bail out Greece with a critical vote next week in the Greek parliament on a new package of austerity measures which is expected to pass, if only by a narrow margin.

And comments from Chinese premier Wen Jiabao in Friday’s Financial Times were highly interesting as Jiabao strongly suggested that monetary tightening measures in that country are over for the time being.  Jiabao declared victory over domestic inflation, saying that the government has successfully reined in price pressures.  “China has made capping price rises the priority of macro-economic regulation and introduced a host of targeted policies…these have worked,” he wrote.  “We are confident price rises will be firmly under control this year…the overall price level now is within a controllable range and is expected to drop steadily.”

Consumer price inflation in China has been rising since the middle of last year, reaching a 34-month high of 5.5% in May.  Politically sensitive food prices have been the main driver of headline inflation, rising more than 10% year-over-year in each of the past five months.  Food inflation hit 11.7% in May, feeding fears that persistent price rises could exacerbate social tensions.  Most analysts predict that the headline inflation rate will peak soon before starting to decline.  According to an HSBC purchasing manager’s index, inflationary pressures have eased in China’s manufacturing sector.  Any easing of Chinese monetary policy over the second half of the year, combined with a slight to moderate pick-up in economic growth which has been slowing there recently, would likely have positive implications for global equity markets.  China may have engineered a “soft landing”.

On Thursday, John posted a chart on Copper which is holding up extremely well (it’s looking quite bullish in fact) in the face of the current global economic slowdown and all the “gloom and doom” talk you hear on CNN and elsewhere in the media.  Copper, which closed at $4.10 Friday, has solid support at $4 a pound.  It’s an extremely important metal to watch as it has proven to be a very reliable leading indicator for the global economy.

Gold

Gold nearly touched $1,560 an ounce last week before falling sharply Thursday and Friday to close the week down $38 at $1,502. Silver was off $1.58 per ounce to $34.32 while the U.S. Dollar Index climbed to 75.58 from 74.98 the week before.

There are so many fundamental factors in favor of Gold right now that a drop in the crude oil price is not going to send the yellow metal crashing.  One must remember, oil is down 39% from its July 2008 peak while Gold is up 50% since that time.

Oil is also a major component of the cost structure for producers, so a softening or leveling out of energy prices is welcome news for a lot of companies.

Given the chart below from John and continued strong physical demand in the Gold market, we see little chance of the yellow metal dropping by more than $75 an ounce from current levels before rebounding once again and charging to new all-time highs.  Fibonacci support has proven to be very reliable.

The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies and governments in general, 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. 

We suggest readers check out Frank Holmes’ excellent article (“Investor Alert – Will Gold Equity Investors Strike Gold“) posted June 17  at www.usfunds.com.  Holmes has one of the brightest minds in the investment industry and in that article he paints a very clear picture of how Gold mining shares present such a great opportunity at the moment for long-term investors.  Some interesting facts regarding Gold from his June 24 alert include:

• The import of Gold and Silver by India has risen 222 percent between April and May 2011 as compared to a year ago. In the month of May alone, imports were a staggering $9 billion, a growth of 500% compared to the month a year ago. To put this into perspective, the yearly average of Gold imports by India is $22 billion, indicating in May alone they already reached 40% of the average;

• Peoples Bank of China (PBOC) has announced that in view of the rising demand for their Panda coins, the output number of Gold Pandas will be raised from the previously announced 300,000 units to 500,000 this year. The smaller coins in the series will have their maximum circulation numbers increased from 200,000 coins to 600,000 for each series. Also, the PBOC says that it is doubling the maximum issuance of silver Panda coins from 3 million to 6 million. To emphasize this growth in demand, issuance in 2010 was just 1.5 million;

• The big rises in the maximum issuance for the smaller Gold coins and the series of Silver Pandas is yet another indication that not only is demand exploding for precious metals among the Chinese growing middle class, but also confirmation that the government is encouraging its citizens to buy precious metals.