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TSX Venture Exchange and Gold

Gold’s Halloween scare – an intra-day drop of nearly $40 to a fresh 4-year low – was encouragingly mostly shrugged off by the Venture Friday which interestingly touched support at 760 and then closed at its high of the day, 769.59.  This potential “hammer reversal” requires confirmation Monday.

The divergence between RSI(14) and price last week is curious.  As shown on our 9-month daily chart, the Venture’s new low of 760 was not confirmed by RSI(14) which hit extreme levels earlier in the month.  In addition, sell pressure (CMF) has weakened considerably from its mid-October peak and was very low Friday as the Index hit 760.  The evidence suggests that selling – at least for now – may have exhausted itself.  The next couple of trading days will reveal much in terms of whether the Venture’s 26% slide over 43 trading sessions (vs. a 35% drop over the same period in the TSX Gold Index) is over.

For the week, the Venture fell 35 points or 4.3% vs. a whopping 15% decline in the TSX Gold Index (the Gold Index hit a low Friday not seen since late 2002 after a 40% correction which was then followed by an immediate major leg up).

What we’ve witnessed over the last couple of months are extreme moves.  Whether this has been a capitulation moment, or a sign of more trouble brewing further down the road, is impossible to conclude at the moment.  However, history has taught us that whenever bearish or bullish sentiment reach certain extremes, that’s the ideal time to either buy or sell.  In this carnage, we’re convinced there are some Golden opportunities and we’ll be focusing on some of the best in the week ahead.

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 carry out exploration or 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 eventually create a supply problem and therefore great opportunities in Gold and quality Gold stocks.  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.

Gold

Gold couldn’t hold support at $1,200 and suffered its worst week since June of last year, falling $58 an ounce or 4.7% to close at $1,173, primarily due to a surging greenback.  The U.S. Dollar Index got fresh fuel from Wednesday’s unexpectedly hawkish tone from the Fed, and after the Bank of Japan surprised the markets Friday with a stimulus package that drove down the value of the yen and gave global stock markets a major boost.

There is certainly some concern about Gold falling below the $1,180 level, the 2013 double bottom low where it rallied from strongly on both occasions.  A $70 bounce off that area occurred after a perceived triple bottom around $1,180 during the first week of October.

So what are we looking at now?  John’s long-term weekly chart shows strong support for Gold around $1,150 – the metal dipped as low as $1,160 Friday.  Some follow-through weakness is certainly possible Monday or early in the week, but the $1,150 area – give or take $10 or $20 – has an excellent chance of providing a near-term floor.  RSI(14) on the 5-year weekly chart is approaching support, and interestingly is significantly above the RSI(14) low hit in June of last year.  A major increase in physical buying from Asia with Gold in the mid-$1,100’s would inject some needed confidence into this market.  Meanwhile, the Dollar Index is approaching major resistance in the high 80’s and bullion’s turnaround should certainly begin after the greenback’s parabolic move exhausts itself and overbought conditions start to unwind.

There is plenty of potential for volatility in the coming week, across all markets, with mid-term elections in the U.S. Tuesday (will Republicans take the Senate and gain control of Congress?) and a jobs report due Friday from the Labor Department.

Gold 5-Year Weekly Chart

Gold 6-Month Daily Chart

Gold’s recent inability to push through resistance in the low $1,250’s gave fresh encouragement to the bears who are now hoping that the $1,150 area will fail.  However, sell pressure was very unconvincing on this break below $1,180 as you can see on this 6-month daily chart.

Silver, unable to overcome resistance around $17.40, took the path of least resistance and plunged briefly below $16 an ounce Friday before closing at $16.18, a loss of $1.03 or 6% for the week (updated Silver charts Monday morning).  Copper remained flat at $3.06.  Crude Oil sank another 47 cents a barrel to $80.54 while the U.S. Dollar Index surged by more than a full point to close at 86.91.

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 and will continue to support prices.   Despite Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact based on the following factors:

• Growing geopolitical tensions, fueled in part by the ISIS terrorist group (air strikes won’t stop them) and a highly dangerous and expansionist Russia under Vladimir Putin, have put world security in the most precarious state since World War II;
• Weak leadership in the United States and Europe is emboldening enemies of the West;
• Currency instability and an overall lack of confidence in fiat currencies;
• Historically low interest rates;
• Continued strong accumulation of Gold by China which intends to back up its currency with bullion;
• Massive government debt from the United States to Europe – a “day of reckoning” will come’;
• Continued net buying of Gold by central banks around the world;
• Flat mine supply and a sharp reduction in exploration and the number of major new discoveries.

Deflationary concerns around the globe and the prospect of Fed tapering had a lot to do with Gold’s plunge during the spring of 2013 below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew momentum traders away from bullion. Deflationary concerns persist, and now Gold is having to grapple with a a much stronger U.S. Dollar.  However, we’re convinced that the 40% drop in Gold from its September 2011 all-time high is merely a healthy correction within an ongoing long-term bullish cycle that will take the metal to new all-time highs as the decade progresses.  There are many potential catalysts, including inflationary pressures that should eventually kick in, to power Gold to $2,000 and beyond within a few years.