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CDNX and Gold

After declining the first week of January, the CDNX bounced back this past week and climbed 45 points to close at 2271.  It hit a new 2.5-year closing high of 2303 Wednesday before a pullback of a combined 32 points Thursday and Friday.  Interestingly, the CDNX found support at its 10-day moving average (SMA) Friday as it bounced back from an intra-day low of 2256.  Advancing issues also led decliners for the day despite the 18-point drop.

The CDNX’s rising 20-day moving average (SMA), which currently sits at 2233, has provided exceptional support since the big run that started last July.  As long as the 20-day continues to rise, one has to stick with the trend and remain long.  Looking out over the next year, we continue to see a strong probability of the CDNX reaching a new all-time high (3400+) as the masses eventually start pouring in.

The CDNX’s strong out-performance vs. Gold and the TSX Gold Index recently has been quite remarkable.  Gold has dropped about 5% since its December high.  The TSX Gold Index has shed a whopping 15.5% in just over a month while during the same time the CDNX has actually climbed 13.7%.  What are we to make of this?

What we believe the CDNX is telling is that the outlook for Gold over the coming months is very positive as outlined in John’s chart this morning (The Big Golden Picture).   We have found the CDNX to be an extremely reliable indicator in terms of the future direction of Gold prices and commodities in general, so its action recently in the face of some weakness in Gold confirms John’s bullish outlook for the yellow metal over the next six months at least.

The TSX Gold Index appears to be nearing a bottom as shown in the chart below.  You’ll note that RSI(14) levels are very close to the February, 2010, low, and there is also very strong support at the 300-day moving average (SMA, dark blue line) where it has bounced off repeatedly since mid-2009 with the exception of a brief period very early last year when it dropped only 5% below the 300-day (the light blue line is the 200-day SMA).

Gold itself has strong technical support at $1,350.  The possibility of a breach of that support certainly exists but the CDNX, the TSX Gold Index and John’s chart (The Big Golden Picture) clearly show that Gold is near a bottom with $1,300 being a worst-case near-term scenario (if this were to happen, it would be a brief “wash out” move supported by short covering and physical buying).  Whatever you do, don’t panic if this type of event occurs – smart money will be buying.

Gold’s weakness Thursday and Friday was largely brought about by an encouraging forecast of U.S. economic growth for 2011 (3 to 4%) by Federal Reserve Chairman Ben Bernanke.  We doubt, however, that Bernanke is going to relax his accomodating monetary stance anytime soon.  U.S. unemployment remains stubbornly high and American debt problems (not just at the federal level but even more urgently at the state and local levels with analysts predicting up to 100 major U.S. cities and states could go bust in 2011) present a significant threat to economic growth.

Janet Yellen, the Vice Chairman of the Federal Reserve, said the most recent round of Quantitative Easing has created or saved 1.8 million jobs so far and will be responsible for another 1.2 million jobs as the money printing program continues.

With rationale like that, the Fed is going to keep its foot on the gas as long as possible.

The main drivers for Gold remain solidly intact – currency instability, an extended period of negative real interest rates (inflation is greater than the nominal interest rate, even in China and India despite increasing rates there), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitcal conflicts, and the list goes on.

Gold was down $7 for the week after a steeper drop of 4% during the first week of January.  Silver continues to hold above important support at $28, closing at $28.48 Friday.