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TSX Venture Exchange and Gold

It was an important week for the Venture as the Index held critical support at 495 and suddenly gained momentum Wednesday as the greenback went into reverse, thanks to some weak economic data and rather timely bashing from an important Fed official, while Gold took off and pushed above its 200-day moving average (SMA) for the first time since October.

The Venture closed at 508 Friday, confirming a breakout above resistance at 500, and the nearly 2% gain for the week compared very favorably with a 5.4% pullback in the NASDAQ, a 1.6% drop in the Dow, a slight loss in the TSX, and an 8.1% tumble in WTIC.  The Venture clearly benefited from the powerful move in Gold with the yellow metal advancing $55 or 4.9%, while the TSX Gold Index rocketed 17% higher.  It pays to be a contrarian which is why 6 of our Gold stocks from our December Top Opportunities List are already up 30% or more, while the HGU ETF has delivered a 50% return.

The Fed will once again be the center of attention this coming week as Janet Yellen gives 2 days of testimony on the economy before congressional committees Wednesday and Thursday.  Last Wednesday, New York Fed President William Dudley (a voting member of the Fed’s policy making committee) “talked down” the greenback in an interview when he warned that additional strength in the U.S. dollar could have “significant consequences” for the U.S. economy.  He also stated financial conditions were “tightening”.  Those comments were music to the ears of the Gold bugs and put the dollar bulls on the defensive.  Even some positive components in Friday’s U.S. jobs report couldn’t hold back bullion which has been the top performing asset class so far in 2016.

Venture Updated Chart

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 pointed out Thursday.  If that analysis is correct, the right shoulder could emerge on a healthy pullback from 520 or perhaps the next Fib. level just above 530.  Notice how sell pressure (CMF) has gradually declined since mid-November with buy pressure now building rapidly.

For a sustained move, the Venture needs help from more than just Gold and a weakening U.S. dollar – in fact, bullion will likely need to take a breather at some point very soon while the greenback could temporarily recover some of its lost ground.  An Oil rebound, broader market strength, drill results, takeovers – those are factors the Venture will need in its favor.  We look forward to positive developments over the near-term on several key exploration fronts.

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 has been performing exceedingly well over the past couple of years, and is now starting to advance sharply in greenback terms, too.   So don’t get fooled by the widespread negativity/indifference in the American media toward Gold.  Bullion in Canadian dollars, for example, is in a major bull phase and certain high-quality Canadian Gold producers have given investors tremendous returns since late 2013.

U.S. Dollar Index Update

Last weekend, with the Dollar Index threatening to break out to the upside – something the U.S. economy can’t afford to have happen – we speculated the Fed might actually try to talk the dollar down if it felt it needed to.  And that’s exactly what occurred.  As the saying goes, bulls make money, bears make money, but pigs get slaughtered.  The record run in the greenback since the summer of 2014 created a lot of pigs, and some of them got slaughtered as the Dollar Index suffered its sharpest single day decline in 7 years Wednesday.  A period of consolidation is likely to follow.

The only bright spot for the dollar was a bullish engulfing pattern Friday when the Index regained more than one-third of a point at the same time as Gold powered $18 higher.  A mild recovery in the greenback is possible in the coming days but deteriorating technicals will likely constrain the dollar or keep it under pressure over the next few months at least. 

Gold

Gold has been the 2016 “safe haven” so far and enjoyed a tremendous week, adding $55 an ounce to finish at $1,173 (the October high was $1,192).

Bullion in 2015 posted its 3rd straight annual loss in U.S. dollar terms for the 1st 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 year from now, it’s entirely possible that investors will look back at January 2016 as the beginning of a new bull market in Gold.  That’s what we’re anticipating but right now it’s simply too early to tell.  The first major technical evidence of a new bull market would come if the metal were to blast through the $1,200 level with that key resistance then acting as new support.

This 6-month daily chart shows RSI(14) conditions now in overbought territory at 77% which likely means that $1,200 for now is probably the high-water mark for bullion.  A band of resistance on this chart runs from $1,175 to $1,222 (Fib.).  If the $1,130 area (200-day SMA) can hold as support on any pullbacks, Gold will be well positioned to overcome $1,200 resistance at some point during 2016.

Silver jumped 77 cents last week, closing at $15.01 (updated charts in Monday’s Morning Musings).  Copper enjoyed another good week, adding 4 pennies to finish at $2.10.  Crude Oil fell nearly $3 a barrel to $31.00 while the U.S. Dollar Index tumbled 3 points to finish at 96.96.

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):