TSX Venture Exchange and Gold
The CDNX enjoyed a strong week, gaining 81 points or 4% to close at 1985. As John’s three-year weekly chart showed yesterday, the evidence in our view is irrefutable that the correction in the CDNX that began March 7 is finally over. The market bottomed at 1862 June 28, slightly below the 300-day moving average (SMA) which has also provided key support during bull markets throughout the last decade. A major pullback of more than 20% was exactly what the CDNX needed after climbing a whopping 83.5% over an eight-month period beginning in early July of last year. This correction of 24% was exactly in line with the historical average for major CDNX corrections which typically occur once a year during a bull market cycle.
How quickly the Venture wants to push forward remains to be seen – we’ll let the market give us that answer. There is obviously some technical resistance at the 2000 level, right around the declining 50-day moving average (SMA), so one possible scenario is that the CDNX could react at 2000, fall back marginally and catch its breath for a short period. Another scenario, of course, is that the Index could blast right through 2000 and then challenge the next resistance level which would be 2050. But the bottom line is this: Based on technical and historical evidence, we should see a very strong CDNX through the balance of the year with the possibility of one or two minor pullbacks (5% to 7%, for example) that would present excellent buying opportunities. A year-end close of 2400 is very realistic. Over the last decade, the CDNX has closed the year an average of nearly 30% above the low of a major correction. A 30% move from 1862 would represent a gain of 559 points by the final trading day of the year or a 2011 close of 2421. Just a prediction based on historical patterns, but those patterns do give additional credence to John’s technical analysis and his Fibonacci target for the CDNX – no timeline given – of 2853. A year-end close around 2400 would certainly set the stage for a push to the 3000 level and perhaps beyond by sometime in 2012 when the CDNX 1000-day SMA can also be expected to reverse to the upside.
The CDNX 10 and 20-day SMA’s are now pointing north and we suspect the market will really start gaining momentum once the 50-day SMA reverses which is likely to occur sometime this month. John gave us a “Big Picture” chart yesterday – this morning he provides a daily chart going back to last fall for us to examine.
Any bull market phase in the CDNX requires regular injections of fuel, the high octane variety. That should come from even higher Gold (and Silver) prices, continued strength in Copper, and fresh discoveries given the immense amount of exploration taking place in the Yukon, northern BC, Quebec, the western U.S. and elsewhere around the globe. From brokers we’ve spoken with, there’s a lot of cash sitting on the sidelines at the moment waiting to jump into this market. There should be some moderate improvement in the U.S. and global economy over the last half of the year and there seems to be a coordinated effort among major governments, led by the White House, to try to keep a lid on oil prices by bringing more supply onto the market. Wisely or unwisely, it seems strategic reserves are going to be used over the short term as an economic stimulus tool. Bernanke will try to pull another rabbit out of the hat if he has to.
Gold
Gold enjoyed a powerful week. After briefly falling below $1,500 the previous week, finding support at John’s 61.8% Fibonacci level at $1,475, the yellow metal shot up to close at $1,544 Friday thanks to a weak U.S. jobs number (more stimulus coming?) and ongoing euro zone sovereign debt concerns. Republicans and Democrats on Capital Hill are now talking about a much smaller debt deal which Gold bulls will love – there’s no question now that the U.S. deficit and debt problems won’t be properly addressed until after the 2012 elections for a variety of reasons.
Silver is looking strong once again, finishing at $36.71 Friday. Crude Oil regained some lost ground and closed at $96.20. Copper continues to look very bullish – a positive sign as it’s a leading indicator of the global economy – and is at $4.36 a pound, while the U.S. Dollar Index finished the week at 75.08.
Gold stocks are about the cheapest they’ve been relative to Gold in the last 30 years (the cheapest point of course during the Market Crash of 2008). As readers know, one of our favorite smaller producers is Richmont Mines (RIC, TSX) which at $7.43 is trading at less than 10 times anticipated 2011 earnings. The company has no debt, $50 million in cash, and a growing production profile (80,000 to 85,000 ounces this year, a 40% increase next year and a potential three-fold jump in current production within about three years if Wasamac is brought on stream as expected).
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies and governments in general, 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.
We suggest readers check out Frank Holmes’ excellent article (“Investor Alert – Will Gold Equity Investors Strike Gold“) posted June 17 at www.usfunds.com. Holmes has one of the brightest minds in the investment industry and in that article he paints a very clear picture of how Gold mining shares present such a great opportunity at the moment for long-term investors. Some interesting facts regarding Gold from his June 24 alert include:
- The import of Gold and Silver by India has risen 222 percent between April and May 2011 as compared to a year ago. In the month of May alone, imports were a staggering $9 billion, a growth of 500% compared to the month a year ago. To put this into perspective, the yearly average of Gold imports by India is $22 billion, indicating in May alone they already reached 40% of the average;
- Peoples Bank of China (PBOC) has announced that in view of the rising demand for their Panda coins, the output number of Gold Pandas will be raised from the previously announced 300,000 units to 500,000 this year. The smaller coins in the series will have their maximum circulation numbers increased from 200,000 coins to 600,000 for each series. Also, the PBOC says that it is doubling the maximum issuance of silver Panda coins from 3 million to 6 million. To emphasize this growth in demand, issuance in 2010 was just 1.5 million;
- The big rises in the maximum issuance for the smaller Gold coins and the series of Silver Pandas is yet another indication that not only is demand exploding for precious metals among the Chinese growing middle class, but also confirmation that the government is encouraging its citizens to buy precious metals.
