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TSX Venture Exchange and Gold

What we expect will be a stellar third quarter for the Venture Exchange has started on a positive note with the Index adding 9 points over the first three trading sessions of July to finish the week at 1038, just 12 points shy of the mid-March yearly high.  It’s only a matter of when, not if, the Venture will bust through the 1050 area and proceed to the next major resistance which is 1150.  Within that bullish environment, astute investors should profit handsomely in our view.

Firming metal prices, impressive drill results, technical momentum – those are all critical factors that should contribute to a very buoyant CDNX as the summer progresses.  Selectivity will be key, though, as a lot of the heavy lifting will come from a select group – companies that are well-managed and can also deliver results and communicate effectively.

John’s long-term weekly chart shows 1150 – 1350 as a reasonable (conservative) target range for the CDNX over the next 6-9 months, with a major acceleration in the bullish 2014 pattern expected during the current quarter.  Any dips will be buying opportunities with previous exceptional support around 970 now supplemented by powerful fresh support at the 1000 level.  We’re in an entirely new market, though many investors haven’t woken up to that fact yet.  The Venture’s 300-day moving average (SMA) is also now beginning to reverse to the upside – historically, such an event has always coincided with a bullish new cycle.

Venture 5-Year Weekly Chart

RSI(14) on this 5-year weekly chart continues to follow an uptrend line which illustrates how the bulls are now firmly in control.  The RSI recently found a “comfort zone” in the immediate vicinity of the 50% level, as expected.  A modestly overbought condition in the RSI(14) that emerged in March when the Index hit 1050 gradually unwound with this indicator now on the upswing again at 62% (plenty of room to move higher).

The Q2 decline that took the Venture to important support at 968 May 20 came on light volume, and accumulation (CMF indicator) remains steady and strong – the most extended period of healthy accumulation we’ve seen, actually, in a few years.  This is a very bullish scenario, and includes a recent +DI/-DI crossover.  Those who gave up on this market recently made a profound miscalculation.  Astute investors have a great chance to cash in big over the next few months in particular before the possibility of a fourth quarter correction.

Venture 6-Month Daily Chart

As an investor, it’s always critical to weigh risk-reward.  The chart above shows a bullish primary trend firmly intact with the high probability of the Venture breaking out to at least 1150 this summer (perhaps significantly higher).

What this 6-month daily chart shows is the potential downside from current levels, which is very limited.  There is major new chart and Fib. support at 1000 on top of the massive support at 970 that held during the minor Q2 pullback (of course the 970 area was major resistance over many months last year).

The realistic downside from current levels, therefore, is less than 4% with the primary uptrend remaining intact even in a worst-case scenario dip into the 970’s.  That’s why this is one of the rare occasions when one backs up the truck and loads up on high quality Venture opportunities – the upside potential vastly outweighs the downside risk.

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 is that it forced producers (at least most of them) to start to become much more lean in terms of their cost structures. Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their 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 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.

Gold

Gold is trying to work its way through a resistance band between $1,320 and $1,330, and closed Friday at $1,320 for a $5 weekly gain.  What the Venture is clearly telling us is that bullion is headed higher in the coming weeks (this also jives with seasonal patterns), though exact timing is uncertain.  Bullion may have to consolidate its recent gains for a short period before launching a successful push through the $1,330 area.

Gold had back-to-back gains over the last two quarters, a rally not witnessed since 2011. In addition, Gold prices have climbed 10% this year as physical demand in Asia has remained steady while (importantly) investment liquidation has ceased, contrary to bearish forecasts coming out of Goldman Sachs.

HSBC Research suggests that Gold’s recent rise can be largely attributed to the combination of the covering of speculative short positions on the COMEX and an increase in ETF bullion holdings.  In its metals outlook, Deutsche Bank agrees that short covering has been a driver, but goes further to say that broad gains could be on the horizon for Gold, with bullion climbing into the upper $1,300’s as short sellers start to run scared now that Gold has found its footing.

Gold 6-Month Daily Chart

Gold broke below a symmetrical triangle in late May and then recovered immediately with a very powerful June – that kind of action should have bears concerned, especially since June has been Gold’s worst month of the year going back two decades.

The $1,280’s to $1,300 should prove to be solid support on any potential near-term pullback.

Silver gained 28 cents last week to close at $21.15 (John will have updated Silver charts Monday morning).  Copper broke above resistance at $3.20, adding 7 cents last week to finish at $3.23.  Crude Oil fell nearly $2 a barrel to $103.77 while the U.S. Dollar Index jumped one-quarter of a point to 80.27.

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 Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact – 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 at $4 trillion and still expanding, 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 had a lot to do with Gold’s plunge during the spring of 2013  below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew “momentum traders” away from bullion.  The June 2013 low of $1,179 was likely the bottom for Gold.  Extreme levels of bearishness emerged in the metal last year.  With the long-term bull market remaining intact, we expect new all-time highs in Gold as the decade progresses.  Inflationary pressures should eventually kick in around the globe after years of ultra-loose monetary policy.