TSX Venture Exchange and Gold
It was another wild week on the markets with fresh concerns over economic growth in Europe and the United States as well as continued fears the euro zone may not be able to contain its debt crisis. The Dow was off 4% for the week and has now endured its worst 4-week drop since March, 2009. The S&P 500 fell 4.7% and has plunged 16% over the past month. The Nasdaq dropped 6.7% for the week, the TSX declined 4.3% while the TSX Gold Index climbed 3% as the yellow metal reached yet another all-time high of nearly $1,900 an ounce. The VIX (Volatility Index) closed at an extreme level of 43 which shows there is plenty of fear on the street. From a contrarian standpoint, that’s an encouraging sign.
Thanks to record-high Gold prices, the CDNX fared better than the major markets and slid just 2.9% or 52 points to 1765 after posting a slight gain the previous week. The Index has support around the 1760 area and held up extremely well Friday in the face of significant drops in New York and Toronto. Volume remains low. A lot of cash is sitting on the sidelines, waiting to jump in at just the right moment.
So what’s happening and where do things go from here? Many investors are fearing a re-run of 2008 when markets started crashing over the summer with selling intensifying in the fall. Rarely, however, does history repeat itself so exactly and so soon after such a major event. There are significant differences between now and then, not the least of which is the fact there is no “credit crunch” like there was in ’08.
Bank of Canada Governor Mark Carney is well respected and we hope some of our Canadian readers had an opportunity to watch his testimony before a Commons committee Friday. Below are some comments from Carney that we felt were very important:
“The Bank continues to expect that (Canadian) growth will accelerate in the second half of the year, led by business investment and household expenditures. Ongoing strength in major emerging markets should also help maintain commodity prices at relatively high levels.”
“Recent events serve as a reminder that in a world awash with debt, repairing the balance sheets of banks, households and countries will take years. As a consequence, the pace, pattern and variability of global economic growth is changing, and Canada must adapt.”
The emerging market growth story continues according to Carney and many others, and that’s critical for the resource-dependent Venture Exchange. Investors, especially those in the United States, tend to think of “the economy” or “the market” as if the U.S. economy and the U.S. stock market were all that mattered. While the U.S. remains the most powerful country in the world and has its share of problems at the moment, including a very weak President, the global economy includes 7 billion people, not 300 million.
Many U.S. companies with growing international operations are doing extremely well. In fact, overall, second quarter earnings for companies in the S&P 500 Index have been superb with nearly 71% of company earnings beating expectations (source: ISI, International Strategy and Investment Group). Generally, U.S. and Canadian companies have very strong balance sheets at the moment.
ISI also reports there has been a surge in U.S. money supply recently. M2 has jumped $460 billion (about 5% or 38% on an annualized basis) over the past eight weeks.
While the CDNX has suffered some technical damage the last few weeks, its 300 and 500-day moving averages continue to rise which is unlike the situation in July and August, 2008. From the March 7 high of 2465 to the August 8 low of 1676, the Index has fallen 32% which is very much within the norm of major CDNX corrections that are typically between 20% and 40%.
Below is John’s updated CDNX chart which shows Fibonacci support around 1760. If this level holds again on Monday and the market is able to move higher early in the week, that would be a very positive sign. Failing that, a re-test of the August 8 low could be in the cards.
In the “big picture” scheme of things, we can’t help but think with Gold at record prices, and likely to push even higher over the coming year, investing in quality Gold stocks (advanced exploration plays and producers) is a long-term winning strategy.
Gold
It was another amazing week for Gold as the yellow metal rocketed to another new all-time high of $1,879 on the Spot Market, closing at $1,853 per ounce for a weekly gain of $107. That’s after a jump of $82 the previous week.
John’s near-term Fibonacci target is $1,938 and we could see that as early as tomorrow – who knows. However, Gold has become hugely overbought technically at the moment. It has simply gotten ahead of itself, albeit only temporarily. A 10% correction would be a healthy development and certainly wouldn’t be surprising. Gold is making its longest run of weekly gains since April, 2007. That’s when pullbacks usually happen, and Gold has also climbed abnormally above its 200-day moving average (SMA). The mainstream media are also now jumping on the Gold “story” and that’s another sign that we have just seen, or we’re about to see, a short-term top. We emphasize short-term because, as we have repeated many times in this space, our belief is that we are witnessing the bull market of a lifetime in Gold and $3,000 an ounce as early as next year can’t be ruled out.
If we do indeed get a near-term pullback in the Gold price, producers are likely to back off at least a little. This would set up a major buying opportunity in our view. As John’s chart showed Friday, the TSX Gold Index is currently in a resistance band between 404 and 416 (closed Friday at 413). A drop of 5% or so in the Gold Index to unwind current overbought conditions (the Index has jumped 18% since bottoming out in mid-June) could set the stage for a dramatic new push to the upside that could take out the resistance up to the 416 level. Market-timing is never easy but that’s one potential scenario to watch for.
Silver is looking strong and closed $3.83 higher last week at $42.90. Copper declined another 15 cents to $3.98. Crude Oil slipped another $3.12 a barrel to $82.26 while the U.S. Dollar Index lost just over a half a point as it finished the week at 73.99.
The “Big Picture” View Of 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.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, governments and world leaders 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 recent 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 have climbed another 50% or more.
