TSX Venture Exchange and Gold
It was a wild week on the markets thanks to clear evidence of a global economic slowdown and growing problems in the euro zone. Friday’s very disappointing U.S. jobs number – 69,000 vs. expectations for 150,000 – sent the Dow tumbling nearly 300 points while Gold jumped a whopping $66 an ounce as traders and investors speculated on possible new measures from the Fed. The Dow has declined in 18 out of the last 22 sessions, a total drop of 1,150 points or nearly 9%.
The Venture Exchange, after gaining 7% the previous week, outperformed the broader markets again last week by declining just over 1% (17 points) to 1292. The Venture is clearly benefiting from a view that Gold found a bottom in the low $1,500′s and is starting a powerful new advance. Since May 16, the Venture has jumped 6%, the Dow and Nasdaq have each fallen about 4%, while the TSX is essentially unchanged. The Venture’s 10-day moving average (SMA) has reversed to the upside and is climbing strongly, but what is required soon is a reversal in the 20-day SMA which would confirm that this move has some legs to it.
The Venture found support last week at its 10-day SMA and also at Fibonacci retracement levels between 1274 and 1288. These are important levels to watch in the coming week and they really must hold for this market to begin to gain traction. We’d like to see the Venture get back above 1300 on a continued increase in volume. Below is a 15-session daily chart from John that provides some hope.
Central Banks To The Rescue?
All eyes will be on Fed Chairman Ben Bernanke this coming week as he testifies Thursday about the state of the U.S. economy before a Congressional committee. The Fed meets June 19-20.
Markets will also be watching closely how policy makers respond in Europe with Spain’s debt problems now a major focal point and elections in Greece just a couple of weeks away. Coordinated action is urgently required to pull the euro zone back from near the edge of the cliff, and that’s going to take a lot of money printing.
Europe accounts for 22% of China’s exports, so it’s no surprise China’s economy has been slowing down as shown by a weakening PMI and important indicators such as power production, railroad freight volume and new bank loans not far off their five-year lows. Additional policy easing from China is likely but the government hasn’t given any indication yet that it plans to put the pedal to the metal like it did with a huge stimulus program in 2009. So far, China isn’t panicking and the Shanghai Composite Index is still holding on to a gain of 7% for the year – putting the country in the top half of emerging markets and above all developed markets for equity performance.
Economic growth in India, meanwhile, showed its weakest quarter in 9 years – and inflation is still a problem there.
Major central bank intervention on a global scale would be bullish for Gold, commodities in general and the Venture Exchange over the summer and into the fall. The month of June is going to be crucial. The early signs are encouraging.
The message Gold delivered Friday is that the odds of Bernanke attempting to pull another rabbit out of the hat have increased significantly in step with downside risks to the U.S. economy. Stocks typically lead the metal, and over the last 10 days or so we’ve been pointing out how the TSX Gold Index – and perhaps the Venture also – appeared to put in important lows May 16. So Friday’s move, as impressive as it was, should not have come as a huge surprise – the stocks were insisting that the floor on Gold was in the low $1,500′s and that it wasn’t about to drop below that. The TSX Gold Index is also benefiting from a drop in Crude Oil prices as Oil represents such a major component of most miners’ cost structures.
John’s 1.5-year weekly Gold chart is unquestionably bullish. So Friday’s move was not a one-day wonder in our view. Gold could easily pull back to test $1,600 but the bulls are now back in control after four consecutive monthly declines in Gold.
Gold closed at $1,626 Friday for a weekly gain of $52. Silver gained just 15 cents for the week, finishing at $28.68. Copper continues to suffer and closed at $3.34 while Crude Oil dropped nearly $7 a barrel to $83.23. The U.S. Dollar Index made a bearish intra-day reversal Friday but still closed up half a point for the week at 82.80.
The “Big Picture” View Of Gold
As Frank Holmes so effectively illustrates at www.usfunds.com, Gold is being driven by both the Fear Trade and the Love Trade. The transfer of wealth from west to east, and the accumulation of wealth particularly in China and India, is having a huge impact on Gold.
The fundamental case for Gold remains incredibly strong – currency instability and an overall lack of confidence in fiat currencies, governments and world leaders in general, an environment of historically low interest rates and negative real interest rates that won’t end anytime soon (inflation is greater than the nominal interest rate even in parts of the world where rates are increasing), money supply growth, 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. Massive central bank intervention appears increasingly likely to prevent a breakup of the euro zone and to kick-start the global economy. It’s hard to imagine Gold not performing well in this environment.