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TSX Venture Exchange and Gold

The Venture Exchange fell for the fourth straight week, losing 25 more points to close Friday at previously defined support at 1120.  It’s an understatement that February was clearly a disappointing month – in fact, it was the worst February ever for the Venture.   The monthly decline was a whopping 7.3%, a setback that has hurt many good companies both in terms of share prices and financings.  There have only been two other years (2006 and 2009) in the last decade when the Venture has experienced a negative February.  On both of those occasions, the market dropped just slightly – 1% in 2009 and less than 1% in 2006.  So this year’s February performance was truly staggering with the Index also hitting a new 3-year low (1124).  March didn’t start out any better with the Venture closing another 13 points lower Friday after posting a fresh 3-year low intra-day at 1116.

Why is this happening?  There are many reasons for the Venture’s woes, both technical and fundamental, and certainly some of them are self-inflicted wounds – everything from poor management in certain (too many) cases to the high-frequency trading that’s allowed in these juniors (putting retail investors at a disadvantage).  But one simple fact is key – Gold stocks at the moment are obviously out of favor, and have been for a while.  Since September, 2011, when Gold climbed to an all-time high of just over $1,900 an ounce, the Venture has fallen 38% while the TSX Gold Index is down even more at 45%.  A couple of significant rallies in 2012 notwithstanding, there has been carnage across the board in this industry, from the producers to the juniors.  The bear market began with the juniors in March, 2011, and continues today.

One of our readers posed the question this morning, “It has been a dismal start to 2013.  Is there hope with so much negativity out there?”  In a way, this reader answered his own question.  Yes, there is a lot of negativity out there and that’s why there is hope.  Despair and fear are what one typically sees at or near a market bottom.  Have we seen a final capitulation just yet?  Perhaps not.  The fear factor may have to be ratcheted up just a bit more.  But we’re convinced this is the environment within which fortunes are born – when sentiment is at such negative extremes.  It’s important to point out that, according to the Gold Miners Bullish % Index, sentiment readings regarding precious metals stocks have fallen to an extraordinarily low level – 3.3%, just barely above the previous worst reading at the height of the 2008 Crash.   This sentiment reading stood at 73% just a few months ago, so the dramatic drop since September’s bullishness is remarkable to say the least.  In addition, since last October, hedge funds have cut their holdings of Gold by 56% (source: Bloomberg, Feb. 15, 2013).  There are very few people left who can still turn bearish.  That’s why there’s hope.

Below is a 5-year weekly Venture chart from John that also provides some hope.  What we find encouraging is that on this long-term chart, there’s currently an RSI(14) divergence with price.  One looks for these divergences for clues that a market might be gearing up for a change in direction.  This chart shows support just above 1100 and 1027, a level the Venture touched during a correction from mid-June, 2009, to early July, 2009.   Hopefully the 1100 level will hold – we’ll see.  If not, 1027 is the next key area.  Immediate help for this market would come from a reversal in Gold prices and/or a major discovery or two which would help restore battered investor confidence.

Gold

Gold briefly climbed above $1,600 (resistance) last week but closed Friday at $1,581, a loss of $4 for the week.  What has us encouraged about Gold’s prospects is the current COT structure – commercial traders have dramatically scaled back their short positions, giving a strongly bullish signal.  Bet against the commercials at your own peril (they turned quite bearish in September).  What they’re telling us now is that Gold is putting in an important bottom and bullion’s next major move will be to the upside, but this doesn’t rule out another $50 or $100 drop that shakes any remaining loose apples from the tree.  Keep in mind that Gold’s pullback from its 2011 high is only 18%.  That’s nothing but a mere blip on a long-term chart, yet many commentators are saying Gold’s bull run is over – just like they were in 2008 when bullion crashed 30%.  Gold has tremendous support around $1,500 (plus or minus $50) and there’s every reason to believe this will hold, keeping the 12-year-old bull market completely intact.

Below is a 2-year weekly chart from John that shows a basing pattern between roughly $1,550 and $1,600, a strong support band.  Gold has been trading counter-cyclical to the equity markets in recent months, and that trend can be expected to continue which gives us additional hope that Gold is close to a turnaround.  Near-term corrections in the Dow and S&P 500 appear increasingly likely given sentiment readings (overly bullish) and technical patterns as we’ve pointed out in recent days.  The Dow may yet hit a new all-time high, but watch out after that.

Silver fell 18 cents last week to close at $28.76.  Copper slipped a nickel to $3.48.  Crude Oil lost $2.45 a barrel to $90.68 while the U.S. Dollar Index busted through important resistance at 81.50 to close at 82.28, a gain nearly a full point for the week.

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 that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), a Fed balance sheet now in excess of $3 trillion and expanding at $85 billion a month, money supply growth, 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.