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TSX Venture Exchange and Gold

Note:  There will be a posting during the day tomorrow (Labor Day Monday) followed by Morning Musings at approximately 5:00 am Pacific Tuesday, to begin the new trading week, with an updated version at approximately 9:00 am Pacific.

The Venture backed off slightly last week, losing 8 points to close at 939, but the Index has posted back-to-back solid months  – a 2.4% gain in August after a 4.1% climb in July – for the 1st time in a year. The rise this summer has been gradual, so no overbought conditions exist entering September and the final 4 months of the year.  Importantly, a very strong base of support has been built from 907, the August low, through the now rising 50-day moving average (SMA) at 912 and all the way into the 930’s.  Major resistance, of course, is at 970.

We believe the overall pattern suggests there’s a greater probability of an eventual major breakout above 970 than a breakdown below 900.  Only time will tell, of course, but the bullish case is a compelling one from a technical standpoint.  Charts for numerous individual stocks are looking better than they have in a long time which is also a very positive sign.  Keep in mind, however, that the “heavy lifting” on the Venture for the foreseeable future is going to continue to come from a relatively small universe of companies – the “top tier”, as we call them, the 10 to 15% who have the cash, the expertise, the properties and the drive to execute both on the ground and in the market.  A rising tide will certainly not lift all boats.

A classic example of a company with all of the above qualities is Prosper Gold (PGX, TSX-V) which begins trading Tuesday. Pete Bernier’s promising new deal will be the focus of a special article we’ll be posting tomorrow (Monday) on the Sheslay River Valley (Cu, Au) as we examine why this area of northwest British Columbia is likely going to become a major focus of investor attention.  Geologists are convinced there are undiscovered belts in this well-endowed, under-explored region, making Prosper Gold and Garibaldi Resources (GGI, TSX-V) leading candidates to host a potential world class deposit.  PGX’s Sheslay is already at an advanced stage of exploration.  Given Bernier’s track record, investors should expect him and his team to move at lightning speed. Garibaldi, meanwhile, possesses both the ability and the desire, based on our due diligence, to “seize the moment” with its very prospective Grizzly Property.  It will be fascinating to watch this play unfold in the coming days and weeks.  Combined, the 2 properties cover 240 sq. kilometres with an important “heat engine” – the Mount Kaketsa pluton – originating on GGI’s Grizzly.

Below is John’s updated 9-month daily chart for the Venture.  The trend at the moment remains solidly bullish, and a near-term test of the 970 area seems certain.  This will obviously be an important month for the Index as it has a great chance to gather some serious momentum that could last for an extended period, as opposed to the occasional spurts that have petered out after a couple of months as we’ve witnessed since the bear market began in the spring of 2011.

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 this year is that it forced producers to learn to become much more lean and mean in terms of their cost structures.  Among many others, Barrick Gold (ABX, TSX), the world’s largest producer, said it may sell, close or curb output at 12 mines from Peru to Papua New Guinea where costs are higher.  Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their operating structures.  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 put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists.  Ultimately, all these factors are going to create a supply problem – think about it, where are the next major Gold deposits going to come from? On top of that, a recent Mineweb study shows grades have indeed fallen significantly just over the past decade.  For instance, grades in the South African Gold sector fell from an average of 4.3 grams per metric ton in 2002 to an average of 2.8 grams per metric ton in 2011.  It doesn’t take a rocket scientist to figure out that the next huge bull market in Gold stocks is just around the corner due to demand-supply dynamics, much leaner producers who will suddenly become earnings machines, and a junior market that will be healthier simply because a lot of the “lifestyle” companies sucking money out of investors will simply disappear or get taken over by individuals or groups who are actually competent and serious about building shareholder value.   A healthy “cleansing” in the market has been taking place.  As this continues, more and more seeds are being planted for an incredible future move in well-managed Gold producers and explorers that could make the dotcom bubble look like a tea party.  As for the juniors, focus on the 10% to 15% of companies that have the ability to execute both on the ground and in the market – companies that have the properties, the cash, the management and the skills to make discoveries that majors will buy.

Gold

Gold pushed through $1,400 and rallied to its highest level ($1,434) since mid-May before pulling back at the end of the week to close at $1,397, leaving it essentially unchanged (down $1) from the previous Friday.  Gold has numerous factors in its favor at the moment, not the least of which is seasonal – September, traditionally, is bullion’s best month of the year.  We’ll see if that pattern continues.  If it does, many traders/investors may come to the conclusion that the nearly 40% drop in the Gold price between September 2011 and late June this year was a much-needed correction that has indeed run its course.

Below is a 3-year weekly chart from John.  Sell pressure, dominant almost all year, has turned into buy pressure.  The ADX indicator shows +DI rising rapidly with strong potential near-term for a bullish crossover.  At 48%, RSI(14) has plenty of room to move higher and could accelerate quickly if and when it pushes through 50.  Notable resistance areas are $1,400, $1,475 and the previous strong support band between $1,550 and $1,600.  Gold was up 5.7% for the month of August.

Bullion will have plenty to deal with this month including an important Federal Reserve meeting, a fresh U.S. jobs report Friday, a reconvened U.S. Congress that will have to grapple with the debt ceiling issue, the nomination by President Obama of a new Fed chairman (or chairwoman, the market is hoping for continuity with Yellen), plus of course geopolitical concerns with Syria at the top of the list at the moment.  An imminent but slow scaling back of the Fed’s bond-buying program –  by no means a certainty starting later this month – has likely already been baked into the Gold price, so Gold may go up no matter what the Fed decides to do at its meeting Sept. 17-18.

Silver finally cooled off a little, falling 55 cents last week to close at $23.53.  It jumped a whopping 19.5% in August and will likely need to test support at $23 (John will have updated charts Tuesday).  Copper slid 12 cents to $3.20.  Crude Oil touched resistance at $110 during the week and finished at $107.65, a gain of $1.23 a barrel.  The U.S. Dollar Index, meanwhile, climbed two-thirds of a point to 82.03.

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 this year’s drop, 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 (especially from China), 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 plunge during the spring below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew money away from bullion.  June’s low of $1,180 may have been the bottom for bullion – time will tell.  We do, however, expect new all-time highs as the decade progresses.  There are many reasons to believe that Gold’s long-term bull market is still intact despite this major correction from the 2011 all-time high of just above $1,900 an ounce.