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TSX Venture Exchange and Gold

The spring of 2012 has been a rough one so far for Venture Exchange investors with the CDNX plunging as much as 15% thanks to seven consecutive weekly declines.  It’s in times like we’re in now, however, when serious money is made.  The same levels of pessimism have been prevalent on a few important occasions over the last couple of years – during the 20% pullback in 2010, the panic sell-off that culminated in a drop to 1300 early last October, and last December’s weakness that resulted in a fall to 1400.  This past week, the CDNX touched 1425 with the daily RSI(14) reaching an oversold level not seen since last October.  The market bounced back a bit to close the week at 1460.

During three periods since the beginning of 2010, the CDNX has met resistance at 1700.  And there have been four times when the Index has found support between 1300 and 1425.  So that appears to be the range until new dynamics come into play.  At BMR, our view is that this will be a stellar year for junior resource stocks and those who are selling in fear right now are making a mistake.  Support levels for the Venture are very strong and historically the Index has almost always enjoyed a very positive year when there has been a first quarter gain.  Fundamentally, the global liquidity boom engineered by central banks over the last several months is an underlying bullish factor for Gold and the markets despite the correction we’ve seen in Gold since the end of February.

The Venture Exchange has fared better than the TSX Gold Index this year (a 1% loss vs. an 11% pullback) and that kind of out-performance has usually been a very positive sign for the speculative juniors.  Gold stocks in general are hugely oversold, especially relative to the broad market.

Below is a very revealing chart of the TSX Gold Index showing the six major declines since 2007.

The average correction has been 26% and each dip has been a turning point.  The Index has been in decline for almost four months.  Either we’re in an entirely new realm for Gold stocks, or else we’re on the verge of a major reversal to the upside.  Sector weakness in Gold equities over the last six years has typically ended with “V”-shaped moves to the upside.  If you accept the theory that the TSX Gold Index has bottomed out, or is very close to a bottom, then now is certainly the time to be a bargain hunter on the Venture.

Gold

Gold, which has shown great support in the low $1,600’s, rose marginally last week to close at $1,659.  Silver was off slightly for the week, finishing at $31.50.  Copper weakened to $3.65, Crude Oil closed at $102.83 while the U.S. Dollar Index was up half a point Friday and closed at 79.88.

The latest Gold Fields Mineral Services (GFMS) report noted that Gold prices are expected to be driven by euro zone debt concerns and the prospects of additional monetary stimulus. In their view, the yellow metal has the potential to breach the $2,000 per ounce level in 2013. The report also said total cash costs for producers increased 15% in 2011 to $643 per ounce, up from $560 per ounce in 2010.  Declining mine grades are the largest component of the increase, contributing $28 of the $83 per ounce net increase. All-in costs (including depreciation as well as general and administrative charges) increased 22%.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being 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, is having a huge impact on Gold.

The fundamental 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 and negative real interest rates that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), money supply growth, 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.