February 14, 2016
The Week In Review And A Look Ahead
TSX Venture Exchange and Gold
Reminder: Canadian and U.S. equity markets are closed Monday for respective holidays in each country.
The Venture added a modest 3 points last week but this compared favorably with the 3% decline in the TSX and the 1.5% drop in the Dow (despite Friday’s big surge, the broader markets were still negative for the week). The Venture, of course, was aided by another sharp advance in Gold prices, and a solid argument can now be made that the bear market in bullion that began in September 2011 is now over. As usual, it’ll take the masses a while to figure this out but that’s okay – they’ll be chasing prices much higher later this year and into 2017 when they’ll finally come to the conclusion that a new bull market has started.
The outperformance of the Venture vs. the broader indices over the last several months, despite a further drop in Oil prices, is telling us something, and that’s why we’ve been emphasizing Gold stocks since November when the crowd got it wrong big-time – they were throwing Gold stocks overboard at precisely the wrong time, just before the Fed finally pulled the trigger on an interest rate hike.
Venture Updated Chart
As we stated last weekend, there’s little ambiguity in the Venture chart at the moment as the Index has recaptured the modest momentum it had at the end of 2015 and appears ready to quickly challenge next resistance at 520. An inverted head and shoulders pattern could be forming as we recently pointed out. If that analysis proves correct, the right shoulder would emerge on a healthy pullback from 520 or perhaps the next Fib. level just above 530. Notice how sell pressure (CMF) began to decline in mid-November with buy pressure now building rapidly.
This is important – since late January the Venture has been supported by its rising EMA(8) and EMA(20) which are currently at 506 and 502, respectively. As long as that continues, the Index will keep edging higher.
The Seeds Have Been Planted (And Continue To Be Planted) For The Next Big Run In Gold Stocks
There’s no better cure for low prices than low prices. The great benefit of the collapse in Gold prices in 2013, and last summer’s fresh weakness with the drop below $1,100, is that it has forced producers to become much more lean in terms of their cost structures. Producers, big and small, continue to make hard decisions in terms of costs, projects, and rationalizing their overall operations. Exploration budgets among both producers and juniors have also been cut sharply. In addition, government policies across much of the globe are making it more difficult (sometimes impossible) for mining companies to carry out exploration or put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe). Ultimately, all of these factors are going to eventually create a supply problem and therefore historic opportunities in Gold and quality Gold stocks. Think about it, where are the next major Gold deposits going to come from? On top of that, grades have fallen significantly just over the past decade.
Keep in mind, as well, that in currencies other than the U.S. dollar, Gold performed exceedingly well in 2014 and 2015, and of course is now advancing sharply in greenback terms, too. The widespread negativity in the American media toward Gold over the last few years is likely going to change dramatically at some point during 2016.
U.S. Dollar Index Update
Any rallies in the Dollar Index are going to be restrained now by a declining 50-day SMA, currently at 98.31. For the first time since the summer of 2014, the greenback has been knocked off stride and the uptrend is over – at least for the foreseeable future. Significantly, the Fed has also weighed in on the dollar just recently, making its concerns known about the negative affects of a strong U.S. currency. That’s giving Gold investors some added confidence. At the very least we see the Dollar Index testing support around 93 during this first half of the year, a level it hit and bounced off from on a few occasions in 2015.
This new trend in the greenback began after the Dollar Index high of 100.60 in early December. Keep in mind, the Venture always performs best when the Dollar Index is under pressure.
Gold
Gold has accelerated to the upside in each of the past 4 weeks. Last week’s $65 jump followed gains of $55, $20 and $9. If this trend continues, we could obviously see $1,300 this coming week – so much for the collapse below $1,000 that so many pundits were predicting. Gold has done just the opposite and roared to a new 52-week high last week.
Bullion in 2015 posted its 3rd straight annual loss in U.S. dollar terms for the first time since 1998. As we’ve been pointing out, however, the bear market that started in Gold in late 2011 reached the long-term average late last year in terms of both duration (47 months) and decline (44%). A new bull cycle now appears to be underway.
Many factors are powering bullion higher, not the least of which is a broad concern about the health of the global economy and if central banks really know what they’re doing. Janet Yellen’s testimony before House and Senate Congressional committees last week was rather discomforting. Politically, there’s no astute economic or foreign policy leadership in the United States which is critical to global stability. It’s no surprise, then, that Americans are embracing anti-establishment candidates in the run-up to November’s presidential elections. The world is slipping into chaos during Obama’s final year in office, and Gold and Gold stocks could absolutely soar in the process. In fact, even though Oil is facing supply and demand problems right now, the possibility exists for a spike in Crude later this year in the event the Middle East descends into all-out war brought on by Russia and Iran. Both countries took advantage of a weak U.S. Presidency under Jimmy Carter in the late 1970’s – rest assured, they will attempt to do so again before Obama leaves office. There’s also ISIS and other Islamist terrorist groups to contend with who present a far greater danger to the world than “climate change”. It will take a Donald Trump or a Ted Cruz to fix the mess and reassert American strength on all fronts.
This 6-month daily chart shows RSI(14) conditions remain in overbought territory at 82%. Longer-term charts, though, confirm that there has been a MAJOR breakout and pattern change in bullion, so it would not be unusual to see technically overbought conditions for an extended period on shorter term daily or weekly charts.
The next measured Fib. resistance level on this 6-month daily chart is $1,288 while very strong support exists between the October high of $1,192 and previous Fib. resistance at $1,222. Wisely, given the price momentum we were seeing in Gold, we held off on recommending a short position against the TSX Gold Index but that option is still one we’re considering if the risk-reward ratio becomes more favorable (i.e., if there’s another near-term spike in Gold and Gold stocks). We will keep our subscribers advised.
Gold 6-Month Daily Chart
Silver powered 74 cents higher last week, closing at $15.75 (updated charts in Tuesday’s Morning Musings). Copper fell 6 pennies to $2.04. Crude Oil was volatile, losing $1.56 a barrel for the week to finish at $29.44, while the U.S. Dollar Index dropped another full point to 95.97.
The “Big Picture” View Of Gold
As Frank Holmes so effectively illustrates at www.usfunds.com, the long-term bull market in Gold has been 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, has had a huge impact on bullion and will continue to support prices. Despite Gold’s largest annual drop in 3 decades in 2013, and current weakness, the fundamental long-term case for the metal remains solidly intact based on the following factors (not necessarily in order of importance):
- Growing geopolitical tensions, fueled in part by the ISIS and al Qaeda, and a highly dangerous and expansionist Russia under Vladimir Putin, have put world security in the most precarious state since World War II;
- Weak leadership in the United States and Europe is emboldening enemies of the West;
- Currency instability and an overall lack of confidence in fiat currencies;
- Historically low interest rates/highly accommodating central banks around the world;
- Continued solid accumulation of Gold by China which intends to back up its currency with bullion;
- Massive government debt from the United States to Europe – a “day of reckoning” will come;
- Continued net buying of Gold by central banks around the world;
- Mine closings, a sharp reduction in exploration and a lack of major new discoveries – these factors should contribute to a noticeable tightening of supply over the next couple of year
February 12, 2016
BMR Market Morning Musings…
Gold has traded between $1,232 and $1,247 so far today…as of 10:30 am Pacific, bullion is down $7 an ounce at $1,239…Silver is flat at $15.76…Copper is up 2 pennies at $2.04…Crude Oil has soared $3.11 a barrel to $29.32 on more (questionable) hopes for near-term production cuts after hitting a 13-year low yesterday…the U.S. Dollar Index, meanwhile, has gained nearly half a point to 96.03…
Credit Suiise analysts, who admit Gold prices rose faster than they expected, say “our fundamental view on Gold remains constructive”…back in December, the bank forecast a 2016 market deficit due to supply constraints, stable physical demand and doubts the Federal Reserve would be able to hike interest rates as fast as markets were factoring into prices at the time. “Although we did not forecast the relative speed at which this Gold-positive scenario would play out, we did expect increasing supply/demand deficits into 2017 and 2018 primarily on declining supply,” the bank stated…
CME Group is raising margins on Gold futures as of the end of business today, the exchange operator reported…the “initial” margin for speculators on the Comex division of the New York Mercantile Exchange will rise to $4,675 from $4,125…margins for other accounts are going up as well…
A Fed official thought it was necessary to give some words of encouragement to Wall Street this morning…New York Federal Reserve President Bill Dudley said the economy is “healthy” and better equipped for “shocks” than before the financial crisis…Gold doesn’t quite agree with that…Dudley added that monetary policy remains “quite accommodative” after the central bank’s decision to hike interest rates in December…policy has only “limited” ability to respond to volatility with rates already low, he said…
Russia has warned Saudi Arabia today that deploying ground troops in Syria risks “unleashing a new world war”…
Crude Oil Update
Crude Oil prices, which fell 14% this week before an about-turn in one of the most volatile weeks ever, have been rising since late in trading yesterday after The Wall Street Journal posted translated comments from the United Arab Emirates’ energy minister about whether OPEC members are more open to cutting output…the minister said they are “ready to cooperate,” though he also said other countries must participate, too…that has yet to happen, despite increasing talk of it in recent weeks…Venezuela, meanwhile, proposed that OPEC and non-OPEC producers should at least freeze output at the current level, but who’s listening to Venezuela?…
Meanwhile, Oilfield services firm Baker Hughes reported today that the number of Oil rigs drilling in U.S. fields fell by 28 to a total of 439, compared with 1,056 at this time last year…
In today’s Morning Musings…
1. A fascinating 5-year weekly Gold chart that shows the significance of this week’s activity…
2. Don’t trust any rallies in the Dow…
3. Calibre on the comeback…
Plus more…to view the rest of today’s Morning Musings, login with your username and password, or click here to gain full access to this and other exclusive BMR content and features…
