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TSX Venture Exchange and Gold

The Venture has strung together 8 consecutive winning sessions for a total gain during that period of 57 points or 6.4%.  The 3-year weekly chart we’ve been tracking regularly over the last few months (fresh update tomorrow morning) gives irrefutable proof in our view that the bears are exhausted and have lost their control over this Index.  It is safe to declare, then, as we’ve been suggesting, that the Venture bear market is finally over after a total decline of 1606 points or 65% from the early March 2011 high of 2465 to the late June 2013 low of 859.  The period of consolidation since the beginning of last summer has been very encouraging and has laid the groundwork for a sustainable advance. Overwhelmingly bearish sentiment peaked and that’s when turnarounds typically occur (in contrast, extreme bullish sentiment peaked in late 2010/early 2011).

There are still some hurdles for the Venture to cross, however, and keep in mind that a rising tide will not lift all boats.  Selectivity is going to continue to be very important – so focus on the companies that are very active on the ground, have healthy balance sheets, strong management teams, superior properties, attractive share structures, and an aggressive communications strategy.  Healing and cleansing of this market will continue throughout 2014.  The strong will not only survive but many will thrive.

The Venture has poked its head slightly above its 200-day moving average (SMA) for the first time since 2011.  A reversal to the upside in this SMA will be critical, and the possibility of that occurring later this quarter (mid-February perhaps) is very real.  The 100-day, in the 930’s, is now beginning to rise and should provide strong support.  The Venture last week also overcame chart resistance at 915 and 925 which now becomes fresh support as well.  The Index closed Friday at 945 for a gain of 26 points for the shortened week, on top of the 31-point advance the previous week.

The key hurdle for the Venture to cross is the very stiff resistance in the 970’s (precise timing of such an important breakout remains uncertain, though it’s merely a question of when in the coming weeks, not if in our view).  Once this is cleared, look out – the bears will be scurrying like chickens from a fox.  Another attempt to push through this resistance could certainly come as early as this week given the current strong up momentum in the RSI(14), a bullish +DI/-DI crossover and a reversal from sell pressure to buy pressure in this 9-month daily chart from John.

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 in 2013 is that it forced producers (at least most of them) to start to become much more lean in terms of their cost structures. Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their their overall operations.  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 (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe).   Ultimately, all of  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, grades have fallen significantly just over the past decade.

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 small universe of companies that have the ability to execute both on the ground and in the market.  Companies that are strong financially, have superior exploration prospects, competent management and clean share structures.

Gold

Gold is in rally mode as 2014 begins, and a near-term test of resistance around $1,275 appears to be in the cards.  For the week, Gold climbed $24 an ounce to close at $1,238.  This 9-month daily chart from John is encouraging in that it shows a double bottom reversal pattern.  However, while we’re confident the Venture has found its low, we’re not convinced that Gold has just yet.  There is no inconsistency in that view.  The Venture has proven to be a reliable leading indicator and peaks and bottoms in this Index historically have preceded peaks and bottoms in the metal – 2011 being a great example when the Venture high occurred six months prior to Gold’s spectacular move above $1,900.

Overall, we believe Gold will surprise to the upside in a volatile 2014 after suffering its worst year (a 28% decline) since 1981.  Too many U.S. money managers are parked in the bearish camp.  Accumulation by China has been relentless.  We expect a pick-up in demand from India this year, and the heavy selling of Gold ETP’s should certainly abate.

Silver jumped 73 cents last week to close at $20.15.  Copper fell 2 pennies to finish at $3.33.  Crude Oil got hit hard on supply concerns, falling nearly $5 a barrel to $95.44.  The U.S. Dollar Index gained half a point to close at 80.87.

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 at $4 trillion and still expanding, 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, deflationary concerns around the globe and the prospect of Fed tapering 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 $1,179 may have been the bottom for bullion – only  time will tell.  Given the high level of bearishness that exists in this market at the moment, it’s probably safe to say that if Gold hasn’t seen its low yet, it’s at least very close to a bottom (within 10% to 15%).  We do, however, expect new all-time highs as the decade progresses and inflationary pressures finally kick in around the globe after years of ultra-loose monetary policy.  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.