CDNX and Gold
It was a strong week for the CDNX which climbed 64 points to close at more than a two-and-a-half-year high of 2440. Friday’s 29-point gain was impressive as the market closed slightly above the February 22 intra-day high of 2438 (after reaching 2438 early that trading day, the market reacted and promptly gave up as much as 72 points during the same session to signal a short-term reversal). A decisive move through 2450 next week on strong volume would be a very bullish development. Technical indicators (RSI, Stochastics, CMF) suggest we should see such a move. John’s next Fibonacci target is 2790.
It was particularly encouraging to see the CDNX reach its highest level since mid-2008 at a time when Gold has made a new all-time high. As our most reliable leading indicator of the precious metals markets, what the CDNX is telling us now is that Gold’s strength will continue. If the CDNX were going in the opposite direction of Gold at the moment, that would be a warning sign. The CDNX also continues to perform well relative to the TSX Gold Index.
Gold enjoyed another strong week, hitting a new all-time high of just over $1,440 before closing Friday at $1,433 for a weekly gain of $23. Silver rocketed higher and hit a new 31-year high, closing Friday at $35.67.
Unrest in North Africa and the Middle East continues to underpin precious metal prices while the benchmark North American crude, West Texas Intermediate, added $2.51 Friday to close above $104 a barrel for the first time since September, 2008. Rising oil prices have traditionally been bullish for Gold.
Libyan troops loyal to Muammar Gaddafi launched counter-offensives on three rebel-held towns today as the popular uprising escalated into open warfare. The resilience of Gaddafi’s forces in the face of the widespread insurrection and their ability to counter-attack will increase fears that Libya is heading for a protracted civil war rather than the swift revolutions seen in Tunisia and Egypt.
White House Chief of Staff William Daley said today the Obama administration was considering tapping into the U.S. strategic oil reserve as a way to help ease soaring oil prices.
The thing is, though, that the days of cheap oil are likely over, a view stated Tuesday by the International Energy Agency’s chief economist Fatih Birol. The oil market supply/demand fundamentals started tightening before the turmoil in the Middle East began. The big question is, will oil prices remain within a range that the global economy can adjust to and handle, or will we in fact see another oil price “shock” down the road due to unexpected events?
The fundamental case for Gold remains so incredibly strong – currency instability and an overall lack of confidence in fiat currencies, 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, geopolitical unrest and conflicts (with the volatile Middle East being the focus right now), rising oil prices…the list goes on. It’s hard to imagine Gold not performing well in this environment.
Despite signs of an improving U.S. economy, the Fed is expected to error on the side of caution and maintain its accommodative monetary policy for an extended period which is bullish for precious metals and commodities in general. The Fed will want to see payroll gains in excess of 200,000 (February’s gain reported Friday was 192,000) for at least six to nine months and a significant decline in unemployment before withdrawing its massive monetary support (QW2). The current U.S. economic expansion is just 20 months old (expansions since WW2 have tended to be at least 60 months) and there are still significant risks to the economy including troubling high levels of debt at every level of government, a housing market that is still weak, and now a surge in oil prices which has the potential of hitting consumers hard. Interest rate increases in the U.S. appear to be out of the question until at least sometime next year. Overall, this is the type of environment that’s very supportive of Gold and a speculative commodity-driven market such as the CDNX.
