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TSX Venture Exchange and Gold

The CDNX gave back 45 points last week on low volume to close at 2056.   Our bullish outlook for this market continues, however, and has even been reinforced with John’s Gold–CDNX comparative chart posted earlier today.  We have some additional very important points to make regarding what’s unfolding right now.

Our contention is that the 1957 low May 17 was the bottom of a 20.6% correction that spanned 51 trading days beginning March 7.  This was very much in line with the average major CDNX correction over the past decade in terms of both magnitude and duration. It was also remarkably similar to the 2005 correction and the behavior of the Index coming out of both corrections (2011 and 2005) is also almost identical so far.  In fact, on the ninth trading day after first closing above its 10-day moving average in 2005, the Index closed slightly below its rising 10-day SMA after retracing some of its gains.  Almost the same thing has happened now – seven days after first closing above its 10-day SMA, the CDNX has closed slightly below that moving average after some retracing.  If history continues to repeat itself (we’ve seen this trend after other major corrections and the start of new uptrends), the CDNX’s 10-day and 20-day SMA’s will provide reliable support.  The market closed just above the 20-day Friday.

There has been a major change of trend since mid-May in terms of the performance of the CDNX in relation to other markets and this has to be viewed as significant and bullish.  From March 7 through May 17, the CDNX grossly underperformed vs. the Dow,  the Nasdaq, the TSX and Gold.  The CDNX declined 19% on a closing basis during that period while the Dow actually gained 2.5%, the Nasdaq was unchanged, the TSX fell 5.7% and Gold climbed 3.8%.

Since May 17, the CDNX has risen 4.4%, Gold is up 3.7%, the Dow has dropped 2.6%, the Nasdaq has fallen 1.8% and the TSX is up 0.5%.  What this tells is that all the doomsayers right now are looking in their rear view mirrors – the world’s most speculative market would not be performing like it has over the past three weeks (12 trading sessions actually) if a “CRASH” was imminent and the sky was about to fall.  The CDNX’s steep drop in March, in retrospect, was advance warning of a slowdown or a soft patch in the U.S. and global recoveries.  What the CDNX is signalling now, we believe, is that there are better times ahead during the second half of the year (one interesting indicator being overlooked amid the current “doom and gloom” is rising iron ore prices, real world economic activity priced without financial speculation) which makes now the perfect time to be accumulating quality junior Gold and resource stocks.   Unfortunately, most investors make the mistake of being bearish when they should be bullish and vice-versa.

As we stated last week…

The average gain in the CDNX, measured by the year-end close, after eight major corrections in this market between 2002 through 2010 (excluding 2008) was an impressive 27% which would give us a potential year-end target of 2485 for the CDNX.  Investors cannot ignore this kind of statistical information over such a lengthy period – in a 30% gain by the CDNX, a good number of stocks will double, triple or even quadruple in value.  There will be some 10-baggers as well.

The fact the CDNX held up so well on Friday despite the weak U.S. jobs report and the nearly 150-point intra-day drop in the Dow was extremely encouraging.  Friday was an important test and the CDNX managed to pass that test.  It’s possible there could be another one on the way early next week.  Investors need to be patient.  This market has made a nice move since mid-May and the uptrend should gain traction soon enough.  The companies that will lead the CDNX higher are those with strong balance sheets, exciting projects, smart management, strong geological teams and encouraging charts.  Last fall, one could almost throw a dart to pick a stock and make money.  We’re not at that point again at the moment.  But there is money to be made in the right plays if you’re careful.

Gold

Gold was up $5.90 for the week, closing at $1,542.40.  Since March the yellow metal has found rock-solid support at its rising 30-day moving average (SMA), currently around $1,500.  Gold seems to have become very comfortable with the $1,500 price level and that has to be considered very bullish.

Silver, more sensitive to economic weakness because of its industrial uses, declined $1.67 last week to close at $36.29.

The U.S. Dollar Index continues to sputter and closed down more than half a point Friday to finish the week at 73.73 vs. the previous week’s close of 74.75.

Gold demand continues to be strong.  First quarter world Gold demand grew 11% from the same period a year ago to 981.3 metric tons, according to the WGC in its quarterly supply/demand trends report released recently.  Much of the increase was due to investment demand with a 52% jump in purchases of bars and coins more than offsetting a decline in holdings of exchange-traded funds.  Jewelry interest also rose with China and India collectively accounting for nearly two-thirds of the global jewelry demand.

The WGC issued a included a separate section on China in the quarterly supply/demand trends report (data was compiled by the consultancy GFMS).  In the spring of last year the WGC issued a report stating it expected Chinese Gold demand could double over the next decade.  “With the sustained momentum in Chinese Gold demand, this target will probably be achieved in a shorter time scale,” according to Eily Ong, investment research manager with the WGC.  Gold demand grew by a whopping 32% in China last year despite a concurrent 25% rise in the average local currency Gold price.

Demand for Gold in China was so strong during the first quarter that for the first time the country outpaced the combined total of the developed West. If you lump together the Gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries (despite large  increases in demand from France, Germany and Switzerland), the sum of these countries is still outpaced by China.

A slight pullback in prices during the middle of the first quarter and “persistent high inflation levels” pushed China into the position as the world’s largest market for Gold investment. Chinese citizens devoured nearly 91 tons of Gold bars and coins, more than double the amount of a year ago.

This isn’t exactly a new phenomenon in China. From 2007 to 2010, investment demand grew at a compounded annual growth rate of 68 percent, according to the CPM Group. The firm forecasted Chinese investment demand to increase 34.7 percent during 2011 but based on this new data, it may need to adjust its forecast.

Song Qing, director of Shanghai-based Lion Fund Management, told Bloomberg news that, “Gold has taken on a new role in China amid concern about inflation.  Just imagine the total wealth in China and even a small percentage of that choosing to buy Gold. This demand is going to be enormous.”

Central bank buying of Gold throughout emerging markets has been one of many contributing factors to the metal’s rise.  These banks have excess reserves and are looking for ways to diversify away from paper currencies for protection.  Last year was the first net positive year for central banks’ buying of Gold since 1985. They’ve chosen to own Gold over trying to guess whether Portugal or Greece’s debt is the best investment.

The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, an environment of historically low interest rates and negative real interest rates (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), 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.  It’s hard to imagine Gold not performing well in this environment.  The Middle East is being turned on its head and that could ultimately have major positive consequences for Gold.