The Week In Review And A Look Ahead: Part 1 Of 3

TSX Venture Exchange and Gold

On August 26 we wrote, “Wakey wakey, everyone, the CDNX is starting to stir”.  Indeed, the Venture Exchange showed some new vigor last week as it gained 58 points or 3.3% to close at 1810.  A 7-session winning streak was snapped Friday when the Index slipped a miniscule 2 points as the Dow took a beating, falling 253 points on a very poor U.S. jobs report.  Volume on the CDNX was modestly higher last week and should pick up again next week following the unofficial end of summer and the Labour Day long weekend when many traders and investors re-focus on the market.

John’s near-term Fibonacci level of 1931 for the CDNX is still valid.  That’s not an official target, just a theoretical level based on technical analysis – it’s an area where the CDNX appears to be headed during this reversal pattern that just recently kicked in.  And John’s Fibonacci levels have generally been very accurate.

The major markets are volatile at the moment and so is Gold.  What potentially could really help the CDNX in the coming week is positive exploration news from numerous companies.  Many exploration programs have been in full swing since late spring/early summer and it’s normal that a tsunami of drill results hits the market beginning in September.  Some companies are reluctant to put out news in the “dog days” of August and wait until after Labour Day to feed a hungry market. Everyone needs to keep a close eye on news releases beginning first thing Tuesday morning.

Gold

Gold has done something it has probably never done before – on back-to-back Fridays it jumped exactly $58 and $59, respectively.  The yellow metal has been on a roller coaster ride recently which included a run to a new all-time high of just over $1,900 an ounce followed immediately by the largest absolute fall in more than three decades and then another powerful move back up to $1,884 where it closed Friday.  We see significantly higher prices for Gold later in the year but for now, unless it proves us wrong, Gold is still in the midst of a short-term consolidation phase as John reiterates in the chart below.  We’ll go into more detail on this chart tomorrow, but you’ll notice that Gold is currently very close to an outer resistance channel line.  The RSI(14) shows that Gold is very overbought.  In addition, the current gradient also appears to be unsustainable.  Gold however does have strong support at and near the inner resistance channel line.  So for the immediate future, we don’t believe this is the time for Gold to make its next big run to $2,000 and beyond.  We’re convinced that moment is coming, likely during the fourth quarter of this year, but right now the current overbought technical condition needs to at least partially unwind.

For the week, Gold was up $55 an ounce.  Silver climbed $1.75 to $43.25, Copper gained 3 more pennies (encouraging) to $4.12, Crude Oil advanced $1.38 despite Friday’s drop of $2.48 a barrel, while the U.S. Dollar Index strengthened by three-quarters of a point to 74.71.

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 two 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.