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TSX Venture Exchange and Gold

Note: We’ll now be covering individual stocks as part of our Week In Review every second week until further notice. 

The CDNX pulled back slightly last week, losing 25 points to close at 1533.  The Index found support at its 20-day moving average around 1500.

For the month of October, the CDNX is up 4.5% on unimpressive volume while the Dow Jones Industrial Average has climbed a whopping 8.2% which so far represents the second largest monthly gain by the Dow since 2003, eclipsed only by the July 2009 advance of 8.6% (historically, the average monthly gain for the Dow in October is 1.36%).  We would be much more impressed with the market over the last few weeks if the situation were reversed – the CDNX, as the ever-reliable leading indicator it is, led the markets higher in 2009 and 2010, and what it has been doing since March is leading the markets lower.  The rally in the Dow since October 4, fueled considerably by short-covering, cannot be trusted.  Bulls are being set up for a nasty surprise.

While the possibility of the CDNX rallying a little higher – perhaps even to 1700 – cannot be ruled out as John’s chart showed a few days ago, any such move should be viewed in the context of an overall bear market.  Those who are in the bull camp at the moment should consider a few important facts:

1. The CDNX’s 50, 100, 200 and 1,000-day moving averages (SMA) are all in decline with the important 300-day SMA flattening out and seemingly ready to reverse to the downside (the last time the 300-day turned negative was just prior to the 2008 Crash);

2. The Chaikin Money Flow (CMF-14) indicator is at buying pressure levels where the Index began to sell off in April, July and September;

3. RSI(14) is near resistance, just below 50, and the Slow Stochastics oscillator is in overbought territory, similar to levels in July.

The 33% decline in the CDNX this year, vs. a slightly positive 2011 for the Dow so far, is a huge red flag for the broader markets that there is serious trouble ahead in the global economy.  Ignore this warning at your peril. What’s even more disturbing is that this decline in the CDNX has occurred in the midst of record high Gold prices.

Gold

While Gold failed to push through resistance around $1,685 last week, and fell $43 to close Friday at $1,642, patience is the name of the game.  The yellow metal did find support at $1,600, as expected, and still looks very bullish as John’s latest chart shows:

Commercial short positions in both Gold and Silver are at very low levels – they have dropped dramatically – which is another bullish indicator.  The commercial traders are seldom wrong and it’s not simply wise to bet against them.

Silver was down 76 cents for the week to $31.40.  Copper fell 18 cents to $3.23.  Crude Oil gained 60 cents to $87.40 while the U.S. Dollar Index fell one-third of a point to 76.27.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being 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, is having a huge impact on Gold.

The fundamental 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 and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitical unrest and conflicts, and inflation concerns…the list goes on.  It’s hard to imagine Gold not performing well in this environment.  The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.

What’s also driving Gold is the weakness of the United States, brought on in no small part by one of the most ineffectual Presidents the nation has ever been saddled with.  America has lost its way and the recent S&P downgrade is both a real and a symbolic reflection of that.  Since the summer of 2009, the U.S. economy has produced a net total of just two million jobs while federal spending has gone through the roof.  Throughout its incredible history, the United States has demonstrated an amazing resiliency and the ability to bounce back from major economic, social and political troubles.  It will do so again but this will take time and a real Commander-in-Chief in the White House by November, 2012.  By then Gold will have climbed another 50% or more.

The U.S. Dollar Index (76.61) has weakened, which is bullish for Gold, while there are encouraging signs in Silver as well which closed Friday at $32.16.  Copper finished the week at $3.41 while Crude Oil also firmed up, closing at $86.80.