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TSX Venture Exchange and Gold & Silver

Just a few months ago, on a day when the Dow would plunge 200 points and Gold would fall $20 an ounce, the TSX Venture Exchange would bleed even more and shed at least 20 or 30 points.

Friday, something very telling occurred:  Major North American markets came under significant pressure with the Dow down 205 points (1.5%), the S&P 500 off 24 points (1.7%) and the Nasdaq losing 67 points (2.2%) while Gold fell through a strong support area and closed down $20 an ounce.  Yet, the Venture Exchange actually gained 3 points – its fourth consecutive daily advance.

What that demonstrates is how much the speculative junior resource market has changed in recent months.  There is now some inherent strength in this market that just didn’t exist not so long ago.  The Venture is still not without its challenges, but our contention is that this will be the best performing market in North America over the next six months at least.  Since the beginning of August, the Venture has gained 11% vs. advances of only 6.4%, 2.5% and 2.2% for the TSX, the Dow and Nasdaq, respectively.  Gold, meanwhile, has added $105 an ounce or 6.5% since that time to $1,720.  Silver has been a great performer, climbing 18% since the end of July.

Levels of extreme pessimism prevailed over the Venture in the April through June period in particular.  That’s always the time to be a buyer, not a seller, and that’s the message we were trying to get across to our readers at the time. A recent reversal to the upside in the 1,000-day moving average (SMA), after a four-year decline, is strong evidence that there has been a very important trend change with the Venture.

Most investors are slow to recognize major trend shifts.  A good example was in March, 2011, when the 2+ year bull run turned into a bear market.  It was quite a while after that before most investors caught on to the fact that the Venture was in trouble.  Similarly, it can be argued that this Venture bear market finally exhausted itself after nearly 16 months at the end of June at 1154 and that we’re in the very early stages of a new bull phase.

For the week, the Venture gained 23 points to close at 1316.  A couple of friendly takeovers gave investors encouragement as Prodigy Gold (PDG, TSX-V), a play we’ve consistently mentioned, gained 31 cents or 45% for the week after an all-stock takeover deal with Argonaut Gold (AR, TSX) valued at $341 million.  On Friday, Galway Resources (GWY, TSX-V) announced it had agreed to a $2.05 cash takeover plus a spin-out of two projects.  GWY was up 93 cents or 76% for the week, closing at $2.15.

There are sure to be more deals like the above announced in coming weeks or months as many juniors are simply undervalued, and larger companies are looking to add ounces to their production profiles.  So for those investors who believe that somehow the Venture is about to collapse to 700, sorry – that’s very wishful thinking.  It ain’t about to happen.

For now the Venture appears to be in a trading range between very strong support around 1250 (the 100-day SMA) and resistance at 1350 (just below the 200-day SMA).  Our belief is that the breakout will be to the upside at some point during this quarter.

Below is an updated 6-month Venture chart from John.  RSI(14) bounced up last week but is now at a trendline that it needs to bust through in order for the Index to gain fresh upside momentum.

Gold

It was another rough week for Gold with bullion declining $34 an ounce to $1,720 after a $27 decline the previous week.  Some traders have grown disenchanted with Gold’s inability to get through the $1,800 resistance level, but the fact of the matter is that Gold has enjoyed a big advance over the last couple of months and a moderate pullback is both normal and healthy.  With the $1,730 level breached, next major support is $1,700 while the rising 200-day moving average (SMA) is currently sitting at $1,688 and that could be tested too. The downside, though, does appear to be very limited.

Silver fell $1.41 for the week to close at $32.07.  Copper lost 6 pennies to $3.62.  Crude Oil was off $1.81 to $90.05 while the U.S. Dollar Index fell slightly to 79.63.

John will provide his usual short-term and long-term Silver chart updates as part of Monday’s Morning Musings (new time – 8:30 am Pacific).

Global central bank easing continued last week with Turkey and Brazil both cutting interest rates by 25 basis points.

Gold Purchases By India Predicted To Climb

Purchases by India, the world’s number one importer of Gold, are predicted to climb for the first time in 18 months.  Indians have been cutting back on buying the metal because of a sharp devaluation of the local currency – Gold hit record highs of over 30,000 rupees per 10 grams earlier this year.  With domestic bullion prices declining again, jewellery and investment demand are expected to pick up. India is also heading into its festival season which culminates with Diwali on November 13 and is accompanied by huge spikes in Gold buying.

Bloomberg quotes Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation, as saying that due to pent-up demand and light inventories, imports may jump to as much as 200 tonnes this quarter from an estimated 170 tonnes during the current quarter.

Gold consumption on the sub-continent dropped 42% during the first half of the year to just 340 tonnes from a record 969 tonnes for the whole of 2011 after three years of gains.

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.  QE3 has arrived, and massive central bank intervention is now taking place to prevent a breakup of the euro zone and to kick-start the global economy.  It’s hard to imagine Gold not performing well in this environment.