TSX Venture Exchange and Gold
It was a rough week for the Venture, down 38 points or 4%, but it wasn’t hit as hard as the TSX Gold Index which plunged another 10% to close at 171 as the price of Gold sliced through a support level ($1,320 – $1,350) like a knife through butter. Commodities and equity markets suffered alike as the Federal Reserve clearly signaled its intention to initiate a “tapering” program in the near or more intermediate future. Whether that is justified given the underlying performance of the U.S. economy (job growth is still not robust, and inflation is well below the Fed’s target rate) is what many market participants are questioning.
Expect more market volatility in the days ahead as portfolios are shuffled ahead of the quarter’s end. One particular concern at the moment is how the benchmark U.S. 10-year Treasury, which influences mortgages and other rates, has risen so rapidly recently – it climbed above the psychologically key 2.50% level Friday for the first time since August, 2011. A 90-basis point move in 4 weeks in the 10-year yields is a very rare move and one that has investors concerned, judging by last week’s 2.1% drop in the S&P 500 and a 1.8% loss in the Dow.
The Fed did release an improved outlook for U.S. unemployment, with its range of estimates falling below 7% in 2014 and to 5.8% to 6.2% in 2015. The Fed forecasts also showed that more members see an early 2015 move to raise the target Fed funds rate, slightly ahead of what the markets had been expecting.
In China, meanwhile, concerns continue to mount regarding a slowdown in growth in that country. In addition, a credit squeeze among China’s lenders took a turn for the worse late last week after overnight lending rates surged. The 7-day repo rate, which is seen as gauge of confidence to lend in the interbank market, rose to a record high above 10% Thursday, before easing back to around 8% Friday.
So what does all this uncertainty and volatility mean for the Venture? The Index has already tumbled another 27% this year 64% since its early March, 2011, high of 2465. The charts show clearly defined resistance at 970 and support at 860. Investor participation and psychology at the moment are at the opposite extreme to what they were in late 2010/early 2011, so in general we view this period as one of historic proportions in terms of opportunities for selective investors. A small universe of stocks has performed extremely well in recent weeks, and that’s the universe we’re going to continue to focus on – discovery plays, as well as special situations outside of the Gold-Silver space. Fortunes are born at times like this when the average person on the street has zero interest in junior resource stocks or even producers. Great opportunities are going unnoticed. Be greedy when most investors are fearful; be fearful when most investors are greedy.
Below is a 9-month daily Venture chart update from John. One piece of encouragement is the current divergence between price and RSI(14). The CMF (Chaiken Money Flow) indicator, meanwhile, shows continued buying pressure, though it has tapered off just recently. It will be interesting to see how the Venture performs in the coming week, especially given the usual month-end and quarter-end dynamics.
Gold
Gold got banged down by nearly $100 last week, closing at $1,299 as the unloved yellow metal once again got thrown overboard. It fell through important technical support once Ben Bernanke declared the Fed’s intention of scaling back its bond buying program during the second half of the year. The crash in Gold in recent months has also been moving in tandem with the decline in inflation expectations in the U.S., China and elsewhere. Deflation around the globe has to be more of a concern for policymakers at the moment than inflation. For some producers, bullion is now at a price that makes extracting it almost unprofitable. This is certainly bullish for the long-term – producers are going to have to become “lean and mean”, just like much of corporate America did immediately following the 2008 financial crisis. The pain in the Gold stock space right now is also going to have an impact on future supply (much less exploration, mines will be shutting down) – another long-term bullish dynamic. So the current weakness in Gold is actually setting up the next bull phase, one that ultimately could carry bullion beyond its 2011 high.
Keep in mind that after climbing each year for more than a decade, Gold has so far corrected only 33% from its high – really, a very normal pullback within a long-term bull market in any commodity or stock index. Even lower prices are possible and likely, but our guess is that the bottom is probably somewhere between $1,250 and $1,000. Below is a 2.5-year weekly chart from John. It’s interesting to note that premiums for Gold physical delivery in Shanghai jumped to a staggering $34.82 per ounce overnight Thursday, according to Scotiabank analysts. China is likely buying the dip and buying it big.
India’s Gold demand has slowed lately, but Société Générale expects the market to “carry on as normal” in the long term. The government has sought to restrict imports to deal with a current-account deficit, including another recent hike in the import levy. “We are expecting this to cause some dislocation in the market in the short term as jewelers and importers adjust their trading and pricing mechanisms,” SocGen says. “In the longer term, however, especially given the religious significance of Gold in India, we would expect the market to readjust and carry on as normal. We are looking for a substantial rebound in overall jewelry demand in India this year; the first 4 months have been extremely strong, although the market is now slowing, not only because of the government changes, but also due to rising rupee Gold price and to the time of year. The festival season is over and the monsoon season is starting. The Indian government is currently expecting a ‘normal’ monsoon season, with rains perhaps 98% of the long-term average, which would be positive for Gold demand later in the year.”
Silver got clobbered last week, closing nearly $2 lower at $20.12. It tested and held support at $19.50, and John will have his usual updated Silver charts as part of Monday’s Morning Musings. Copper fell a dime to $3.10. Crude Oil lost $4.16 a barrel to finish at $93.69 while the U.S. Dollar Index found support at 80.50 and then surged nearly 2 points to close the week 82.41.
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 its current weakness, the fundamental long-term 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, a Fed balance sheet now in excess of $3 trillion and expanding at $85 billion a month, money supply growth around the globe, massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, emerging market growth, geopolitical unrest and conflicts…the list goes on. However, deflation is prevailing over inflation in the world economy and this had a lot to do with Gold’s recent plunge below the technically and psychologically important $1,500 level, along with the strong performance of equities which are drawing money away from bullion. Where and when Gold bottoms out in this cyclical correction is anyone’s guess, but we do expect new all-time highs later in the decade. There are many reasons to believe that Gold’s long-term bull market is still intact despite a major correction from the 2011 all-time high of just above $1,900 an ounce.
