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TSX Venture Exchange and Gold

Editor’s Note: Monday’s pre-market Morning Musings will be posted at 4:00 am Pacific followed by an important updated version at 9:00 am Pacific.

The Venture declined slightly for a 2nd straight week after 4 consecutive weekly advances, but the Index continues to show technical strength on modestly increasing volume.  There are many reasons to expect a summer rally to intensify in the weeks ahead, given the current technical posture of the Venture in addition to important moves in Copper and base metals in recent days (not to mention the fact that so many investors have given up on the junior resource market and Gold stocks in general – a bullish contrarian sign).  Crude Oil (WTIC) is strong while Gold found support at $1,280 on a closing basis and finished the week up $2 an ounce at $1,315.  All of this, combined with a much-needed and healthy portion of good news on several exploration fronts as summer results start to roll in, could provide the necessary fuel to power the Venture through critical resistance at 970 this quarter.  Are there still immediate downside risks?  Of course, we can’t deny that, and no one has a crystal ball.  But after studying the balance of probabilities, we believe the balance is tilted more to the bullish side at the moment based on numerous technical and fundamental factors.

While we’re cautiously optimistic right now, we’re not saying the Venture has necessarily found an ultimate bottom in this cycle yet (Fib. support levels in terms of the “big picture” are 860, which has held, 800 and 679).  The 859 multi-year low June 27 may very well end up as having been the bottom, a 65% correction from the early 2011 high, but obviously no one can say for sure at this point.  What we believe we can state again, with increased confidence, is that the Venture appears to be in the early stages of a significant rally that has the potential of accelerating sharply between now and the end of September. The rally most likely won’t be broad-based as so many companies are just struggling to survive at the moment.  Financings of course have dwindled, and a good percentage of them are being completed at prices of less than a nickel under current Exchange “relief” measures in effect until August 31.  As Mineweb’s Kip Kean reported a few days ago after an interview with Venture President John McCoach, financings below a nickel as of September 1 will no longer be permitted but restrictions on share consolidations will be eased.  That’s interesting.  Expect a lot more rollbacks before the end of the year, and good riddance to the “lifestyle” companies that are on life support right now – time to pull the plug.  Obviously, companies that are active with strong working capital positions at the moment must be favored by investors who are looking for the best money-making situations, at least over the immediate to medium-term.  One thing that’s really important to understand about this market – a lot of babies have been thrown out with the bathwater this year, creating historic opportunities for astute investors in our view.

Let’s now take a look at the current technical state of the Venture, and you’ll see why we’re leaning toward the bullish side at the moment.  It’s important to note that last week, the secondary support at 900 that John identified on the Venture held.  Gold got smacked down into the $1,270’s, some investors were getting scared again, but the Venture took it in stride.  After pulling back to 907 last Wednesday, 1 point above its rising 30-day moving average which is obviously providing support, the Index started climbing higher again Thursday and finished the week on a strong note.  The 20 and 30-day SMA’s are rising in tandem – the 1st time we’ve seen that in 7 months.  The 50-day, currently at 912, is flattening out, and the really critical moment will be if and when this SMA reverses to the upside. There’s a good chance that will occur before the end of this month, which would set up a particularly bullish scenario for September.

John’s 9-month daily chart shows increasing up momentum in the RSI(14) which has formed a bullish “W”.  Plenty of support between 906, the 30-day SMA, and 918, the 20-day SMA.  Buy pressure is steady and volume is slightly above average.  You can see how the 970 level is so critical.  On a move through 970, expect a major injection of fresh buying as the technical picture would brighten considerably.

Gold

Gold rallied impressively Thursday and Friday to finish the week up $2 an ounce at $1,315.  After falling through support at $1,320 and then at $1,300 early in the week, it was highly encouraging to see bullion rebound quickly and overcome fresh resistance at $1,300 where the declining 50-day SMA currently sits.  Gold is benefiting from solid physical demand in Asia, strong WTIC prices, and a weak U.S. Dollar Index.  If and when it’s able to blast through stiff resistance at $1,350, massive short-covering could really take bullion for a ride.  Yes, the primary trend is still bearish, until the technicals prove otherwise, but one cannot rule out a powerful upside move that could send Gold back up to the $1,500 – $1,600 area where its collapse started in the spring.  As Frank Holmes recently told Kitco News, “The positive news is that we’re in the historical cycle over the past 35 years that Gold bottoms in July and starts this run in August, September, October”…

In his weekly Investor Alert at www.usfunds.com, which we encourage all of our readers to use as a valuable resource, Holmes also pointed out the following: “Australia’s ANZ Bank is the latest to open a Gold vault in Singapore.  Other recent vault builders there include Deutsche Bank and JP Morgan, while Switzerland’s Metalor has one under construction.  The new Gold vault openings evidence the continued flight of Gold from West to East. It appears Western bullion banks have misjudged the power that Gold retains in the global psyche and as a key financial instrument, especially to Asian buyers. A recent statement by Yao Yudong of the People’s Bank of China Monetary Policy Committee calling for a new system to manage international liquidity is another indication that China is moving toward abandoning the U.S. dollar hegemony. In the future, China may look toward a hard asset backed currency to negotiate, a move that would certainly bode well for bullion”…

Below is an updated 2-year weekly Gold chart from John.  What’s interesting is that the strong bearish trend of the last several months is clearly weakening based on the CMF and ADX indicators. If Gold is able to overcome the resistance band between $1,320 and $1,350, then life is suddenly going to get very uncomfortable for the many shorts currently in this market.

The Seeds Are Being Planted For The Next Big Run

There’s no better cure for low prices than low prices.  The great benefit of the collapse in Gold prices this year is that this has forced producers to learn to become much more lean and mean in terms of their cost structures. Among many others, Barrick Gold (ABX, TSX), the world’s largest producer, said it may sell, close or curb output at 12 mines from Peru to Papua New Guinea where costs are higher.  Producers, big and small, are starting to make hard decisions in terms of costs, projects, and rationalizing their operating structures.  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 put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists.  Ultimately, all these factors are going to create a supply problem – think about it, where are the next major Gold deposits going to come from?  On top of that, a recent Mineweb study shows grades have indeed fallen significantly just over the past decade.  For instance, grades in the South African Gold sector fell from an average of 4.3 grams per metric ton in 2002 to an average of 2.8 grams per metric ton in 2011.  It doesn’t take a rocket scientist to figure out that the next huge bull market in Gold stocks will occur in the not-too-distant future due to demand-supply dynamics, much leaner producers who will suddenly become earnings machines, and a junior market that is healthier simply because a lot of the “lifestyle” companies sucking money out of investors will have thankfully disappeared.  The strong will survive and the weak will perish.  That’s how it’s supposed to work.  A healthy “cleansing” has been taking place, and as this continues the seeds are being planted for an incredible future move in well-managed Gold producers and explorers that could make the dotcom bubble look like a tea party.

Silver, Copper and Oil

Silver jumped 67 cents last week to close at $20.56.  The U.S. Mint reported that American Eagle Silver Bullion coins experienced their best July ever with a whopping 93.4% increase over July 2012 sales. John will have updated Silver charts (short-term and long-term) Monday morning.  Copper, meanwhile, broke out Thursday above important resistance at $3.20, and confirmed that move Friday with another gain to finish the week up a dime at $3.27 a pound.  Copper responded favorably to better-than-expected economic data out of China, while economic conditions continue to improve in the euro zone.  Base metals all rocketed to their highest levels in 2 months. Crude Oil (WTIC) was down about $1 for the week, though it climbed sharply Friday ($2.57 a barrel to close at $105.97). The U.S. Dollar Index remains under pressure and closed the week at 81.13, down more than three-quarters of a point.

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.  Despite its current weakness, the fundamental long-term 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, a Fed balance sheet now in excess of $3 trillion and expanding at $85 billion a month, money supply growth around the globe, massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, emerging market growth, geopolitical unrest and conflicts…the list goes on.  However, deflation is prevailing over inflation in the world economy and this had a lot to do with Gold’s recent plunge below the technically and psychologically important $1,500 level, along with the strong performance of equities which are drawing money away from bullion.  Where and when Gold bottoms out in this cyclical correction is anyone’s guess, but we do expect new all-time highs later in the decade.  There are many reasons to believe that Gold’s long-term bull market is still intact despite a major correction from the 2011 all-time high of just above $1,900 an ounce.