TSX Venture Exchange and Gold
It was another solid week for the CDNX which has enjoyed 10 winning sessions out of the last 12 after ending a long correction that bottomed out at 1862 June 28. Since then the CDNX has climbed 145 points or 8% and is now above 2000 for the first time since June 6. The Index closed at 2007 Friday for a 22-point weekly gain. It out-performed the Dow (down 177 points), the Nasdaq (down 70 points) and the TSX (down 72 points).
The current strength of the CDNX was clearly on display last Tuesday when the Index staged an important intra-day turnaround. Over Monday and Tuesday the CDNX fell 55 points in one last “fake out” to the downside which also successfully tested the rising 10-and-20 day moving averages (SMA). The Index touched a weekly low of 1930 Tuesday morning, closed the day up 7 points at 1952 and rocketed higher on Wednesday.
So where to immediately from here? The CDNX will probably test strong resistance around 2050 in the near future but pushing through that area on the first attempt seems unlikely. So investors have to be patient. We could be looking at a trading range between the 50-day moving average in the mid-1980’s and 2050 for the next couple of weeks before another strong push to the upside next month on increased volume as more players step into the market (look for any pullbacks to find support near the 10 or 20-day SMA). Of course the longer-term “Big Picture” is John’s latest Fibonacci level, 2853 (no timeline as yet). As we stated in this space a week ago, the CDNX has started a powerful new uptrend within the overall bull market phase it has been in for two-and-a-half years.
Whole Gold’s move to a new record high just below $1,600 per ounce has clearly been a significant factor in the CDNX’s recovery since the end of last month, the behavior of the Index at the moment is nonetheless inconsistent with the view, peddled by many pundits, that markets are about to crash and the global economy is going to come to a screeching halt over debt issues and other concerns. In fact, what the CDNX is telling us with its very bullish-looking chart is just the opposite – the U.S. will escape a default but won’t seriously tackle its debt problems until after the 2012 elections, the U.S. economy will come out of a slow patch perhaps in part through innovative new stimulus measures from the Fed, the White House and/or Congress, continued strong growth in emerging markets like China and India will help fuel the global economy, and the euro zone will find a way to kick the can down the road a little further with regard to sovereign debt problems of some of its member states. Yes, much of the public is cowering in fear right now (aided by the Internet and 24-hour news channels) with everything they see happening in the world, and as a result they’re under-invested in the market. That’s about to change, we believe, and the final half of the year is going to be a lot better than most pundits are predicting.
Back in March, a sharp drop in the CDNX was a warning of some trouble ahead for the markets and that’s exactly what occurred though it wasn’t easy to see at the time. The opposite is occurring now, and a 20% jump in the CDNX from current levels is not out of the question by the end of September. The CDNX remains in a long-term bull market, confirmed in part by rising 200, 300 and 500-day moving averages, and the recent 24% correction was merely a normal and healthy pullback from a very powerful eight-month run. The bullish action in Copper, another highly reliable leading indicator, confirms this view.
The CDNX should ride the wave of higher Gold and commodity prices in the coming months. Goldman Sachs, which has been making some accurate calls recently, just wrote in a report that it expects global economic growth to be “generally supportive of rising commodity demand” and “this demand growth will be sufficient to tighten key commodity markets over the next six to 12 months”.
Gold
Gold eked out a 10th straight daily gain Friday, matching a record wining streak set four decades ago. The yellow metal closed at $1,594, a gain of $50 for the week. It’s now up over $100 since July 1. Silver enjoyed a great week, climbing $2.56 an ounce to close at $39.27. Crude Oil was up $1.04 a barrel, Copper gained 3 pennies to finish at $4.39 a pound while the U.S. Dollar Index was essentially unchanged at 75.13.
John’s 2-year weekly Gold chart, which we posted Wednesday night, is our favorite chart of the week as it clearly shows how Gold is in such a powerful upsloping channel. While it likely needs to pause for a bit and catch its breath, the next major target is the $1,675 area as outlined below. Keep in mind that the current Gold price is still 30% below its 1980 inflation-adjusted peak of $2,400 an ounce – a level we believe is possible within as little as a year.
The battle in Washington over raising the debt ceiling is benefiting Gold which increasingly is being viewed as an alternative currency. The Americans will likely find a way to avoid a default by early next month, but political dynamics will prevent any major deal to tackle the deficit and the debt until after the 2012 elections. One should not underestimate the United States and its ability to rebound from any mess it gets itself into. However, President Obama resembles Jimmy Carter a lot more than Ronald Reagan. The next “transformational” presidency won’t come until at least 2012 when Republicans have a chance to regain the White House and sweep Congress. Who that President could be remains to be seen but fighting the country’s debt and re-energizing the economy will be the central themes of the 2012 race.
Federal Reserve Chairman Bernanke told Congress last week that the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling from here. Gold bugs liked what they heard from Bernanke, and a Moody’s warning that the U.S. may lose its top-notch credit rating was a boost for the yellow metal as well.
We’re now about to enter the time of year when physical demand for Gold, which is already strong particularly in China and India, traditionally begins to ramp up. Gold jewelers typically do their biggest business in the third and fourth quarters. The kick-off is the Muslim holy month of Ramadan which starts next month and ends with generous gift-giving in September. Physical demand should drive Gold prices even higher and support any dips over the next few months.
Strong Numbers Out Of China – Positive For Gold & Commodities
Commodities generally rallied last week on economic data out of China. China’s GDP rose 9.5% in the second quarter (higher than the consensus estimate of 9.3%) after a 9.7% gain in the previous three months. Industrial output advanced 15.1% in June. Fixed-asset investment, excluding rural households, rose 25.6% year-over-year in the first half.
China retail sales grew 16.8% year-over-year for the first half of the year. Retail sales were up 17.7% in June, 1.38% than in May. Urban per capita income was up 13.2% year-over-year for the the first half of 2011, beating inflation by 8%.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies and governments in general, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on. It’s hard to imagine Gold not performing well in this environment. The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.
