BullMarketRun.ca

TSX Venture Exchange and Gold

It was an ugly week for the CDNX which went into an abrupt and significant reversal after showing encouraging signs since May 17.  The Index closed at 1935, a loss of 121 points or 6% from the previous Friday, albeit volumes were on the low side.  The drop last week broke a pattern that was astonishingly similar to the 2005 correction.  So what should investors expect now?

What we thought was a 51-day correction of 20.6% that ended May 17 has now stretched to 69 days and 21.9%, making it the third-longest CDNX correction over the past decade.  The 2004 swoon started in early April with the worst of the decline over by mid-May.  The Index traded in a narrow range for a couple of months and then made one final plunge of 10% or so to finally bottom out by late July. In 2008, of course, the CDNX correction started in July and finished in December.

One could also look at the last few months as two separate corrections – a 17% drop over seven trading sessions in March, followed by a 20% slide over the last 43 sessions.  In any event, the worst certainly appears to be over.

It now seems reasonable to suggest that the CDNX could test its rising 300-day moving average (SMA) at 1888 or even drop slightly below that as it did in last year’s correction before finding a bottom.  There is strong support around the 1900 level as demonstrated in November of last year.  Rising 200, 300 and 500-day moving averages, which are in no danger of reversing, are solid evidence that what we’re seeing is just a correction within an ongoing CDNX bull market.  Given historical patterns, there is every reason to believe that the slide which began in early March will indeed conclude sometime this month or July (if it hasn’t already) with not much potential downside remaining.

Times like these are when huge profits are born.  As we’ve pointed out, statistics show that the CDNX has jumped an average of about 30% by the end of the year after the conclusion of a major correction.  If you’re a patient investor who’s not expecting to double his money in three days, now is a fabulous time in our view to be investing in well-run junior Gold companies with strong balance sheets and excellent properties.  There’s a lot of pessimism right now and that’s a good thing from a contrarian point of view.  Based on technical indicators such as RSI and Stochastics, the CDNX is clearly oversold.

Gold

John has an interesting new Gold chart that we’ll be posting later today.  We could see some weakness in the yellow metal over the last half of this month but the “big picture” outlook remains very bullish.  Gold will soon be entering a period of seasonal strength.

Gold was off $10 an ounce last week at $1,532 while Silver declined just 9 cents to $36.29.  The U.S. Dollar Index rallied and gained slightly more than a full point to 74.83.

The big question on investors’ minds, and this obviously has implications for Gold, is whether the global economy has hit just a temporary “soft patch” or if the current slowdown is only the beginning of something much worse that could also cause debt issues in various countries, including the United States, to spiral out of control.  There are plenty of “fear mongers” out there at the moment (most of them can’t see beyond the borders of the United States) who want to scare people.  While there are clearly some major global concerns that will continue to be supportive of Gold, we’re comforted by the fact the CDNX is going through a very normal and healthy correction in terms of magnitude and is supported by long-term rising moving averages.  This is not 2008.

A report last week indicated that the majority of Gold mines in South Africa will shut down within a decade. Despite the bull market of recent years, with the price of Gold rising sharply, South Africa’s Gold reserves are becoming depleted at a rate that within 12 to 14 years would mean the end of the industry for that country.

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.