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CDNX and Gold

It was another banner week for the CDNX as it posted its 10th consecutive weekly advance, adding 56 more points to close Friday at 1878.  The CDNX has climbed a whopping 40% since the early July low of 1343 and is quickly approaching our near-term “target area” – a resistance band between 1900 and 2000 with a declining 200-week moving average in the middle of that range.  Investors who are waiting for a major pullback to jump in are likely going to be disappointed.  At some point in the coming weeks there will be a pause or a minor reaction but there are many fundamental and technical reasons for believing the CDNX is in the midst of a massive move of historic proportions that could ultimately (sometime over the next 12 to 18 months) take this Index over 3,400 to a new all-time high.

We’re not even close to a “mania atmosphere” at the moment with the CDNX or Gold mining stocks in general.  When my next door neighbor borrows a bunch of money to invest in the market and starts giving me a list of CDNX stocks that are about to double in a week, that will be the warning sign that it’s probably time to exit this market.  Right now my next door neighbor isn’t even aware the CDNX has jumped over 500 points in less than 4 months.  He’s scared of the market because of what happened 2 years ago.   He’s also spending far too much time glued to American news channels and is freaked out about the mess “the economy” is in.  He has no global perspective and doesn’t understand the impact emerging markets (China, India, Brazil, Russia, etc.) are having on the demand for metals, minerals and resources across the board.  The copper price, for example, used to very closely track the performance of the American economy.  Now that’s no longer the case.  We’re in a long-term commodities “Super-Cycle” (it did not end with the Market Crash in 2008, it was only briefly interrupted) – a wild global scramble for resources – which is extremely bullish for the CDNX.  The CDNX also has a lot of catching up to do just based on the Gold factor.  Gold is up nearly 70% from this time 3 years ago while the CDNX is down about 40%.

Speaking of the yellow metal, it’s now unwinding its overbought condition which is a positive development from a technical perspective.  Gold actually fell this week for the first time in 6 weeks, closing Friday at $1,327 for a weekly drop of about 3% or $42.  Technically, some minor chart damage certainly occurred this week (for the first time in over 2 months Gold fell below its EMA-20) and BMR’s technical analyst has pointed out 2 Fibonacci target levels ($1,300 and $1,273) that Gold could hit in the immediate future.  However, the primary trend is still very bullish, physical buying has consistently supported any technical weakness in this market, and the action in the CDNX strongly suggests that any near-term downside potential in Gold is very limited.  The pullback we saw in Gold this week, and any additional weakness if there is any, should merely lay the groundwork for another explosive move to the upside with the next target being $1,500.

Much was made of China’s quarter-point interest rate hike this week, the first time in 3 years the Chinese have raised their rates.  What that showed is just how strong the Chinese economy is right now and it’s not likely to slow down significantly anytime soon.  It’s important to point out that China still has negative real interest rates (inflation is running higher) which means there’s no opportunity cost for Gold.

G-20 finance leaders are meeting this weekend in Seoul, South Korea. Currencies will no doubt be the hot topic of conversation.  In this war, no guns are fired and no enemies are killed.  Instead, each country tries to outdo the other with bigger and bigger money printing or devaluations.  Our guess is that some sort of mushy statement about “cooperation” will come out of these meetings but any kind of publicly declared “truce” or  “joint effort” will soon be broken.

The “Quote of the Week” goes to U.S. Treasury Secretary Timothy Geithner who was trying to talk up the Dollar this week.  When asked if the greenback would lose its status as the world’s reserve currency, Timothy responded (in words that may go down in history), “Not in our lifetime”.