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TSX Venture Exchange and Gold

The Venture snapped a 9-session losing skid Friday, albeit on low volume but also ironically on a day when Gold closed $18 lower.  We’ve seen this on numerous occasions since August – bullion has a bad day, yet the Venture essentially shrugs it off.  That’s a sign in our view that Gold is not about to collapse, that somehow it will manage to hold critical support and eventually work its way higher.

In terms of the Venture, which finished the week at 937, the technical picture is very clear-cut at the moment:  The Index is trading between strong resistance around 970 and powerful support around 930 provided by the 100-day moving average (SMA) coinciding with a shorter-term uptrend line as you can see in this 1-year weekly chart from John. Note the accumulation in this market since the beginning of July, and how the RSI(14) has been climbing an uptrend line.  Yes, the Venture fell 18 points last week which may have unnerved some investors but support is holding.  Below 930 there is additional support, but we’d prefer to see the 930 level hold over the coming weeks – this would set the stage for a potential breakout above 970 and a strong start to 2014.  The overall pattern since the late June low of 859 is encouraging but the healing process, following a brutal 65% drop from early 2011, has been slow (not surprising).

RSI(14), at 43%, is currently at support as it continues to climb an uptrend line.  The Chaikan Money Flow (CMF) indicator has shown steady accumulation over the last few months.  The +DI/-DI gap has narrowed considerably since late June, but an important bullish crossover has yet to occur.

Focus On Quality

Patient investors who are accumulating positions right now in the top 10% of Venture companies are planting the seeds that could reap an incredible harvest over the next six to 12 months.  If you’re sitting in front of your screen, fretting about minute-by-minute, hour-by-hour and day-by-day moves in a particular stock, you’re going to lose sight of the big picture and perhaps drive yourself crazy.  You’re also wasting time and energy that could be better spent researching the best opportunities.  And there are some incredible ones at the moment if your time frame is at least several months as opposed to 24 hours.

The Venture companies today (in the exploration space) that have the best chance of increasing by multiples over the next year have the following fundamental attributes in common:

1. Strong cash and working capital positions (a minimum of $2 million preferably) with no immediate need to carry out a financing;

2. Superior management – individuals with proven track records who know how to run a business, understand the markets, tell their company story effectively and can raise money;

3. High quality properties with strong discovery potential in favorable jurisdictions;

4. Geological expertise.  Not all geologists are created equal – a company with great properties but a poor geological team is going nowhere;

5. Clean share structure.  How many companies have obliterated their share structures over the last couple of years?  Investors are regularly selling PP stock after hold periods to just “ride” the warrants;

6. A steadfast determination to build shareholder value.

In our view, a whopping 90% of Venture companies at the moment do not possess all six of these critical ingredients/qualities.  By focusing on the top 10% who do, your odds of success in the market – short-term and long-term – increase immeasurably.   And knowing that a company has all of these factors in its favor, you’re less likely to panic during periods of market volatility.

Technical analysis, of course, is also a critical part of the equation.  Pay close attention to support and resistance levels, and look for a positive long-term trend.

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 this year is that it forced producers (at least most of them) to start to become much more lean and mean in terms of their cost structures. Producers, big and small, have started 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, grades have fallen significantly just over the past decade.

It doesn’t take a rocket scientist to figure out that the next huge bull market in Gold stocks is just around the corner due to demand-supply dynamics, much leaner producers who will suddenly become earnings machines, and a junior market that will be healthier simply because a lot of the “lifestyle” companies sucking money out of investors will simply disappear or get taken over by individuals or groups who are actually competent and serious about building shareholder value.   A healthy “cleansing” in the market has been taking place.  As this continues, more and more 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.  As for the juniors, focus on the small universe of companies that have the ability to execute both on the ground and in the market.

Gold

As we stated a week ago, Gold is range-bound until a catalyst drives it through the $1,360’s or pushes it below critical Fib. support in the $1,270’s.  Bullion was impacted negatively at the end of last week by the ECB’s interest rate cut, which drove down the euro and pushed up the U.S. Dollar Index, in addition to a stronger-than-expected U.S. Q3 GDP number and an October jobs report Friday that significantly beat expectations.  Physical buying has been soft recently which also hasn’t helped Gold – we’ll see if that changes in the week ahead with Gold now back below $1,300.  It closed Friday at $1,290, down $25 for the week.

The top 376 members of China’s Communist Party have gathered for a four-day summit called the Third Plenum to lay out a broad direction for economic policy over the next decade.  The summit concludes Tuesday.  Some analysts have speculated, for various reasons, that the price of Gold could benefit from policies that emerge from the Third Plenum – we’ll see what happens.  According to Barclays, “The stakes are high for commodity markets. If Chinese policymakers decide on a set of moderate reforms while protecting robust economic growth, we expect the impact on commodities would be neutral to positive, as the recent strength in Chinese demand was supported by strong infrastructure spending. However, if the government sets out plans to rebalance the economy more forcefully, sentiment toward commodities demand, especially base metals, could turn negative.”

Below is a 3-month daily Gold chart from John.  Bullion broke below a support band on Friday but Fib. support in the $1,270’s is very strong.

Silver fell 36 cents last week to close at $21.51 (John will have updated Silver charts Monday morning as usual).  Copper was off 3 pennies to $3.25.  Crude Oil slipped again, falling $3.25 a barrel to finish at $94.60.  The U.S. Dollar Index, meanwhile, gained half a point to close at 81.21.  The Index has climbed 2 points over the last 2 weeks after finding support at 79.  In September, the Dollar Index broke below a 2.5-year uptrend on the weekly chart, so it faces considerable overhead resistance.

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 this year’s drop, 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 $3.5 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 (especially from China), emerging market growth, geopolitical unrest and conflicts…the list goes on.  However, deflationary concerns around the globe and the prospect of Fed tapering by the end of the year (not likely now) had a lot to do with Gold’s plunge during the spring below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew money away from bullion.  June’s low of $1,179 may have been the bottom for bullion – time will tell.  We do, however, expect new all-time highs as the decade progresses.  There are many reasons to believe that Gold’s long-term bull market is still intact despite this major correction from the 2011 all-time high of just above $1,900 an ounce.