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TSX Venture Exchange and Gold

It was another rough week for the Venture which declined 48 points or 6.8% after previous weekly losses of 5.4% and 6.0%.  During that time, the Index has fallen in 13 out of 15 sessions or 17.1%.  For the month, it is down 11.9%.  Keep in mind, December historically is the Venture’s best month of the year with an average gain of 4.6%, though these gains typically occur during the last 7 to 10 trading days of the year.

Oil has been the driving force of the Venture’s slide, and Crude’s downside momentum accelerated last week.  Gold has been holding up remarkably well – in fact, bullion is showing signs of finishing the year on a powerful note with a breakout last week through key resistance at $1,220.  So while a general high degree of negativity has been cast over the entire Venture due to the collapse in Oil prices, with Crude perhaps gearing up for a test of $50 support in the days ahead as the “fear factor” ramps up, investors should be keeping a close eye on quality Gold and Silver stocks.   Some outstanding bargains in that space exist, particularly if you subscribe to the theory that Gold will soon surprise to the upside and lift Silver with it.  As far as producers go, they actually stand to benefit significantly on the cost side in 2015 with Oil prices now well below levels that were anticipated.

What we’re witnessing at the moment with the Venture is an “extreme” event, and extreme Venture moves – especially with the benefit of hindsight – have always provided investors enormous profit opportunities.  This will be easy to see on the updated 10-year monthly chart we’ll be posting tomorrow.

Below is a chart that focuses on the current situation.  Not surprisingly, sell pressure has been steadily increasing this month due to the Oil price decline and tax-loss selling.  Oil and gas juniors also issued a lot of paper earlier in the year and it’s now coming back to haunt them (Contact Exploration – CEX, TSX-V – is 1 of many examples).  On the positive side, there continues to be a divergence between RSI(14) and price, with RSI(14) holding above its October low while the Index itself has continued to fall and last week slipped below the 2008 Crash bottom.  The next obvious support level is in the 620‘s.

Historical December trading patterns strongly suggest an important low is imminent, within a matter of days if 650 on Friday wasn’t it.  In our view it’s best to approach the next several days with the strategy of embracing any potential additional weakness in high quality issues as the turnaround will start no later than the week of the 22nd.

Venture Historical December Trading

It might not feel like it right now, but December is indeed the Venture’s best month of the year.  The first 2 weeks of December tend to be weak followed by the start of a significant uptrend during the last half of the month.  This momentum typically carries into January and February before a spring thaw and then a summer rally.

Over the last 3 years, the December low has occurred on the 15th, 13th and 19th, respectively, meaning the odds are extremely high that we’ll see at least a temporary bottom in this market during 1 of the upcoming 5 trading days.  Only once over the past 14 years has the December low been put in after December 19.   If you pick away at the best opportunities in the days ahead, it’s almost impossible NOT to make money looking out over the next couple of months.  Ultimately, the Venture may decide to re-test its December low at some point during 2015, but first we should see a significant rebound out of very oversold conditions.

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

As we pointed out in this space a week ago, if the best the bears could do was knock Gold down $13 an ounce on a blowout U.S. jobs report and an exploding Dollar Index (Friday, Dec. 5), then clearly they’re losing their grip on this market.  Something is underpinning Gold, and that likely includes buying from China, India and Russia.

Gold gained more ground last week and pushed above key resistance at $1,220.  HSBC made a good point the other day when it commented, “Should Oil prices move below $60 (per barrel) and the broader financial markets become worried about the impact of lower energy prices globally, then Gold may receive some ‘safe-haven’ inspired buying.”

Certain countries are in serious financial trouble with Oil dropping into the $50’s, and keep in mind that nearly 20% of the U.S. high-yield market is related to the energy sector.  There are some global economic benefits to lower Oil prices but there are destabilization risks as well.

For the week, Gold finished at $1,222 for a gain of $29 after jumping $24 the previous week.   Bullion enjoyed a spectacular turnaround December 1 when it plunged into the low $1,140’s and then immediately rallied almost $80 an ounce on short-covering and a variety of fundamental factors.

Gold 6-Month Daily Chart

This 6-month daily chart shows Gold climbing an RSI(14) trendline since the $1,130 low November 5.  The next key level for Gold to overcome is $1,240.

Gold 5-Year Weekly Chart

Over the next couple of months, we believe Gold has a greater chance of moving toward the top of the downsloping flag than breaking below it.  This suggests a move as high as about $1,300, at which point Gold will have to make a critical decision.

Silver outperformed Gold last week, a positive sign, as it climbed 75 cents or 4.6% to finish at $17.04 (updated Silver charts Monday morning).  Copper gained a penny to $2.96.  Crude Oil fell below $58 a barrel for the first time since May 2009.  It was down 12% on the week, closing at $57.81.  WTIC is on track for its biggest quarterly drop since the 4th quarter of 2008 (we’ll have an updated Oil chart tomorrow morning with $50 as a minimum downside target).  The U.S. Dollar Index fell a full point to 88.32. 

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 – 2014 could be “Peak” Gold in terms of supply.