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TSX Venture Exchange and Gold

The Venture Exchange appears to have found its footing after a 6.5% drop from its 2012 high February 29.  The Index was off 43 points for the week, closing at 1606, but important support held mid-week when the Index slipped as low as 1585.  We’re viewing the weakness during the first half of March as a normal retracement in an ongoing 2012 bull run that is still in its early stages. John’s 6-month daily chart below shows February’s overbought condition has completely unwound and there’s now a bullish “W” formation in the RSI(14).  Rising 50 and 100-day moving averages, in addition to the 1,000-day SMA, continue to support this market right around the 1600 level.

Volume picked up Friday but still needs to increase more (we believe that will “kick in” over the coming weeks).  Notice how the buying pressure has firmed up recently – “smart money” has been accumulating during this pullback. A breakout through the 1700 level is required for this market to really start to pick up steam and we’re confident that will occur – exact timing is the only question.

During 2012 the CDNX has been performing very well relative to both Gold and the TSX Gold Index, and this pattern is encouraging to see.

The CDNX started to under-perform against Gold and the producers in the spring of last year (as well as the broader markets), and that was a warning sign of trouble on the way.  The CDNX has been on the rebound since December and should soon “overtake” the Gold Index on this chart which we would argue bodes very well for the juniors.  We’ve stated this repeatedly for the last couple of months – now is the ideal time to be positioned in high quality junior mining stocks.  Be patient and you will be rewarded.  The last half of this year, in particular, could be very explosive.

Gold

Gold got hit again last week, selling off on the theory that the Federal Reserve is less inclined to initiate “QE3” given fresh signs of an improving U.S. economy.  The truth is, the Fed and central banks around the world have embraced a very accommodating monetary position and global money supply has increased remarkably in recent months.  The global economic recovery remains fragile, sovereign debt is unsustainable, and many countries are engaged in diversifying out of dollars into Gold as a means to achieve more stable reserve holdings.  There are so many reasons to own Gold.  Physical buying, particularly in China and other emerging markets, remains strong. 

John’s new Gold chart is similar in some respects to the CDNX in that RSI(14) shows a bullish “W” formation.  This is usually a very reliable pattern.  Gold has solid support just above $1,600.  We’re confident it will hold that support.

China’s Ministry of Industry and Information Technology noted in its most recent figures that China holds the title of the world’s number one Gold miner since 2007. The country has continued its dominance in world Gold production with output rising last year by 5.9% to 361 tons. Overall, world production of Gold is not that different from where it was 10 years ago, despite the price gains made over the past decade that should have stimulated more production.

The TSX Gold Index has fallen 13% in just 13 sessions from 389 February 29 to Friday’s close of 338.  This sell-off is way overdone and represents a major buying opportunity with the Index below its 1,000-day SMA for the first time since early 2010 and for one of the few times over the past decade.  We’ll go into some more detail on this in tomorrow’s Morning Musings with charts to support our bullish argument. The bottom line is that Gold stocks are extremely cheap historically relative to the price of Gold.

Silver was off $1.76 for the week to $32.56.  Copper was unchanged at $3.86.  Crude Oil fell slightly to $107.06 while the U.S. Dollar Index met resistance around 80.50 and closed down one-fifth of a point for the week at 79.78.

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 that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), money supply growth, 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.