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TSX Venture Exchange and Gold

Note:  Morning Musings tomorrow will be posted at approximately 6:00 am Pacific.

The Venture continues its march toward the critical 970 level and enjoyed a strong shortened Labor Day week with a gain of 16 points to finish at 955, its highest close since early June.  The Index has posted gains in 8 out of the last 11 sessions.  Particularly impressive last week was how the Venture held up so well during back-to-back weak days for Gold Wednesday and Thursday when bullion fell by about $40 an ounce.   The Venture, however, still managed to close up slightly each day.  It has been a long time since we’ve seen that kind of resilience by the Venture in the face of weakness by Gold, and it suggests renewed confidence in both the yellow metal and the Venture.  On Friday, of course, Gold rebounded and closed $21 higher to finish the week at $1,389. In addition, Crude Oil has staged a significant breakout – more on that tomorrow.

There is little doubt that the Venture will soon test the 970 resistance.  Initially, it could react slightly at that level again and retreat temporarily to its supporting 10 or 20-day rising moving averages (SMA’s) to cleanse any overbought conditions that could emerge, and then make its charge beyond 970.  Alternatively, it could slowly make its way up to 970 and then just blast right through.  Regardless, there is powerful technical evidence to suggest that a major breakout is in the works this month.  In fact, tomorrow we’ll be posting a fascinating chart that proves beyond a doubt in our view – based on a combination of indicators – that the Venture bear market finally peaked in late June, just like the bull market peaked in late 2010/early 2011.  A very important trend reversal has started.

Unlike the two previous failed attempts at crossing the 970 area (late April, early May and early June), the Venture’s 50-day SMA is now rising.  The 100-day SMA has flattened out and appears ready to reverse to the upside very soon.  The Venture has built up strong technical support in the low 900’s.  We’ve seen some failed rallies in 2011 and 2012 which has some investors nervous and ready to hit the sell button to lock in any small gains.  This time, what we’re witnessing in our view is a genuine reversal and you’ll see this clearly in the very important chart we’ll be posting in tomorrow’s Morning Musings.  Keep in mind, a rising tide as we’ve mentioned is not going to lift all boats.  Focus on the 10% to 15% of Venture companies who have the cash, the expertise, the properties and the drive to execute both on the ground and in the market.  By doing that you’ll increase your odds of success tremendously.

Below is an updated 9-month daily Venture chart. Note the increasing buy pressure, the bullish trend as shown by the ADX indicator, and the RSI(14) which at 64% certainly has room to move higher.

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 experienced a volatile week, pushing as high as $1,416 before falling as low as $1,360.  It recovered Friday thanks to weaker than expected August job growth in the U.S., and higher Oil prices.  A couple of consecutive closes above resistance at $1,400 would certainly put the bears on the defensive.  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 the bearish trend has peaked, and a bullish +DI/-DI crossover could soon be in the works.  At 47%, 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 after also increasing in July.

Bullion will have plenty to deal with this month including an important Federal Reserve meeting, 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 vs. Obama’s seemingly preferred choice in former economic adviser Larry Summers), 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 found support at $23 and closed up 31 cents last week at $23.84 (John will have his usual updated Silver charts tomorrow morning).   Copper gained 4 pennies to $3.24.  Crude Oil jumped $2.88 a barrel to $110.53.  The U.S. Dollar Index, meanwhile, was up one-tenth of a point at 82.15.

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.