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CDNX and Gold

It wasn’t quite the week for the CDNX that many were expecting, including us.  However, the week ended on a positive note and provided some great opportunities for savvy bargain hunters.  The trend is your friend and the CDNX remains firmly entrenched in a powerful overall advance that conceivably could take it to new all-time highs this year.  The Index fell 63 points this first week of 2011, a drop of 2.7% which meant it out-performed Gold – a very positive sign as the CDNX is our #1 leading indicator for the precious metals markets (the CDNX hugely out-performed the TSX Gold Index which declined nearly 8% for the week).  Don’t forget, we saw the opposite action last May when the CDNX began to significantly under-perform against Gold and the TSX Gold Index and we ended up seeing a major market correction that finally bottomed in early July.

John’s Thursday night chart shows Fibonacci support at 2203 for the CDNX and even stronger support at 2178.  The current 20-day moving average (SMA) of 2192 is essentially in between these two support levels.  On Friday, the CDNX opened weaker and fell to a low of 2208.  It rallied about 15 points into slightly positive territory, dropped again and successfully tested the daily low, and then rallied strongly at the end of the day to close at its high of the day, 2225.  This was very bullish action and suggests that 2208 may indeed have been an important bottom.  In any event, the downside from current levels is extremely limited in our view.  Look for a resumption of the uptrend next week.

It’s interesting to note that the winning January trading strategy for the CDNX over the past four years (2007 through 2010) has been to do the opposite of the market in the first few days.  On average, the CDNX posted gains the first three trading days each January the last four years.  This was then followed, on average, by a rather steep 12% decline the same month. This year, the CDNX has so far done the opposite.  The market fell the first three days, and we believe a 12% advance is more likely than a 12% correction.

Only once since the CDNX’s run since July of last year has this market fallen below its 20-day SMA – that of course was in November when it fell slightly and very briefly below the 20-day.  What a buying opportunity that was, and John correctly and amazingly called that bottom by just a few points.  The 20-day is the supporting moving average for the CDNX and as long as that continues to rise, as it did with the Nasdaq during its amazing run from the summer of 1999 through early March, 2000, we have nothing to worry about.

Gold took a hit this first week of January, falling nearly 4% to $1,369, but managed to hold above important technical support at $1,350.  The yellow metal rallied from a low of $1,352 Friday when U.S. non-farm payrolls rose less than expected.

The main drivers for Gold remain solidly intact – currency instability, an extended period of negative real interest rates (inflation is greater than the nominal interest rate, even in China despite increasing rates there), massive government debt from the United States to Europe, central bank buying, flat mine supply, physical demand, investment demand, emerging market growth, geopolitcal conflicts, and the list goes on.

A couple of interesting tidbits this week concerning Gold:

Saudi Arabia, one of the world’s largest Gold consumers, has started constructing the world’s largest Gold factory (it’s expected to be completed by the end of this year).  The appetite for the yellow metal in the Arab country continues to grow, even with substantially higher prices.  Saudi Arabia, now the world’s 16th largest Gold holder, more than doubled its Gold reserves last year.  In addition, consumer Gold demand grew an estimated 35% last year.

The Reserve Bank of India is allowing seven more banks to import Gold and silver.  The move is set to fullfill the demand of the country’s citizens.  While 23 banks already have the central bank’s permission to import Gold and silver into the country, the recent approval has brought the count to 30.