TSX Venture Exchange and Gold
It was a wild week in the markets with triple-digit moves up and down each day in the Dow and Gold surging to another all-time high. The speculative CDNX of course wasn’t immune to the extreme volatility in the global markets but when the dust finally settled, the CDNX actually finished 6 points higher for the week at 1817.
Monday’s low of 1676 represented a 32% correction from the March 7 high of 2465. That’s still within the norm for major CDNX corrections. The duration of this weakness has been unusual, however, and we’re simply not sure what to make of that. The 300 and 500-day moving averages continue to rise which is confirmation in our view that the overall bull market remains intact.
The next apparent area of resistance, as John pointed out in his updated CDNX chart in the previous post, is 1862.
Exploration news will play a critical role in this market in the weeks ahead. A tsunami of drill results is just around the corner from the Yukon, northwest Quebec and elsewhere. All it takes is one major discovery to ignite the CDNX and restore investors’ confidence.
Gold
What a week for Gold bugs. A quote from Fred Sturm, chief global strategist for Mackenzie Financial, summed up the yellow metal’s surge this way: “Gold is the best address in a bad neighborhood.” (Globe and Mail, August 11).
U.S. debt concerns, brought into focus by S&P’s credit rating downgrade, as well as continued euro zone debt issues were key drivers in Gold’s move to a new record high of $1,814 mid-week. Fed Chairman Ben Bernanke helped as well with the Fed making the unprecedented statement that it will keep interest rates at current levels until at least mid-2013.
Gold got giddy and clearly became very overbought technically on a short-term basis, pulling back Thursday and Friday to close the week at $1,746. Profit-taking started to come into the market immediately after the announcement that the CME Group had raised margin requirements by 22.2% for trading Gold futures on the Comex Division of the New York Mercantile Exchange.
Despite the much-needed pullback Thursday and Friday, Gold still finished up $82 for the week which was a gain of 4.9%. Silver gained 75 cents to $39.07, Copper fell 15 cents to $4.13, Crude Oil was down $1.50 to $85.38 while the U.S. Dollar Index was essentially unchanged at 74.57.
Gold producers kicked into high gear last week as the TSX Gold Index gained 30 points or 8% to 401. While we focus mainly on the very speculative junior exploration plays at BMR, it’s critical in our view for investors to include some quality producers in their portfolios. These companies, such as New Gold Inc. (NGD, TSX) and Richmont Mines (RIC, TSX) which we highlighted last week, will benefit not only from the strong possibility of even higher Gold prices in the months ahead but also from lower input costs due to oil’s 28% drop from its 2011 high. Oil is a major component of a producer’s cost structure. Many companies have factored in higher oil prices into their 2011 budgets and a higher Canadian dollar as well.
From a technical perspective, as John pointed out in his chart update earlier today, Gold could quite easily drop another $50 or so over the immediate to short-term and test support slightly below $1,700. That would actually be a healthy development. But investors should stay focused on the “big picture” which remains very bullish for Gold. As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being driven by both the Fear Trade and the Love Trade. The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, is having a huge impact on Gold. September is also the beginning of the gift-giving season for the yellow metal which drives up demand. It’s really now becoming just a question of when, not if, Gold hits $2,000 an ounce. Ultimately, $3,000 or more is very possible.
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.
What’s also driving Gold is the weakness of the United States, brought on in no small part by one of the most ineffectual Presidents the nation has ever been saddled with. America has lost its way and the S&P downgrade is both a real and a symbolic reflection of that. Since the summer of 2009, the U.S. economy has produced a net total of just 2 million jobs while federal spending has gone through the roof. Throughout its incredible history, the United States has demonstrated an amazing resiliency and the ability to bounce back from major economic, social and political troubles. It will do so again but this will take time and a real Commander-in-Chief in the White House by November 2012. By then Gold will be up another 50% or more.
