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CDNX and Gold

The CDNX bounced between a high of 2310 and a low of 2220 this past week, closing Friday in between those levels at 2266 for a loss of 5 points for the week.  As John pointed out in a chart yesterday morning, the CDNX is currently trading in a horizontal trend channel between 2200 and 2300 as it continues to digest the 10% or 216 point gain it experienced in December.  With the primary trend still extremely bullish, what we witnessed last week is very healthy market action that is laying the foundation for a decisive move through 2300 and another leg up in the CDNX.

Smart buyers jumped into the market Wednesday when it was down as much as 65 points intra-day, so the key is not to panic in those type of situations and embrace them for what they are – opportunities.  Since July of last year the CDNX has remained in the grips of a powerful move and there’s simply no indication that’s going to end anytime soon.  There are always some jolts along the way (like Wednesday) but fear not – embracing weakness has been the winning strategy with the CDNX consistently ever since this incredible bull market began in late 2008.  The masses haven’t jumped in yet and Gold still has a long way to go.

Wednesday’s CDNX intra-day rebound was encouraging, and so too was yesterday’s action when the Venture posted an 18-point gain despite a 73-point drop in the TSX and continued softness in Gold and commodities in general.  The CDNX has proven to be the most reliable leading indicator there is of the precious metal and commodity markets – the fact this Index has so significantly outperformed Gold and the TSX Gold Index since early December tells us that while Gold could still drop a little lower in the immediate future, the overall trend with the yellow metal is still wildly bullish and a major reversal to the upside is likely near at hand.  A 3-year chart of the TSX Gold Index illustrates this point very well (200-day SMA in light blue, 300-day SMA in dark blue):

The reversal in Gold will come, in our view, when the TSX Gold Index actually touches its rising 300-day moving average (SMA) or actually drops below it (the bottom being in the range of 345-367 and this could be very brief) as has been the case repeatedly over the last two years.   This will be a classic and major buying opportunity, confirmed also by the CDNX which is giving us Gold’s primary direction.  If Gold was on the verge of a major collapse, the CDNX would simply not be performing as it is now – it would in fact be leading Gold to the downside, the opposite of which is occurring now.

Gold was down for the third straight week (dipped briefly below $1,340 and closed Friday at $1,342) and is going through its worst month since last July – all the more reason why a major turnaround is not far off.  This is the third year in a row that Gold has been weak at the beginning of the year but the overall technicals and fundamentals are impeccable.  John’s excellent chart last weekend (“The Big Golden Picture”) draws the line in the sand at $1,300 for Gold with the strong possibility of $1,650 Gold by June.

The main fundamental 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 and India 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.

Gold is currently only 0.3% of total world financial assets.  If that percentage were to rise to 0.6%, still less than half its 1980’s level, the market would see a massive increase in demand.  Gold is becoming a permanently accepted financial asset for money managers around the world, an alternative currency that’s not controlled by a monetary policy board.  More Gold of course cannot be printed, so for the last several thousand years it has been a respected store of value. And it’s a greater challenge than ever now to extract Gold from the ground.

The greenback hit a fresh two-month low this past week with the U.S. Dollar Index closing at 78.12 Friday.  The U.S. Dollar is likely to remain under pressure for the foreseeable future which is Gold and commodity bullish.  Despite improving economic numbers out of the U.S. recently, massive debt across all levels remains a serious threat to the American economy and will likely force the Fed to keep interest rates at historic lows for an extended period.  Of immediate and growing concern at the moment, as we’ve been pointing out with more frequency recently, is the horrible financial condition of U.S. municipalities, cities and states.  This is a major train wreck in the making and we predict this crisis will evolve into a much bigger news story this year.

No less than 100 major U.S. cities and states are in severe financial stress, and the resulting forced austerity at the state and local level will likely reduce public employment, slash pension benefits for millions of public employees, affect consumer sentiment and ultimately prevent the unemployment rate from falling by any meaningful degree.  Hence the Fed is likely to remain as accommodating as possible which also means “Quantitative Easing” may continue for longer than some expect.

On a lighter note, and just another example of the rising interest in Gold, Space International Limited has announced that it’s now offering Gold and silver to the world’s largest market for vending machines—Japan. These vending machines sell the precious metal in the form of coins and ingots right alongside other consumer products such as food and drinks. The Gold will come in weights from one gram to one-quarter of an ounce.

The inflation-adjusted peak price for Gold was reached in January, 1980, at $2,300 per ounce – a very realistic target over the next couple of years.