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October 11, 2014

The Week In Review And A Look Ahead

TSX Venture Exchange and Gold

The bleeding has intensified on the Venture as the Index suffered its worst week out of 6 consecutive bad ones, plummeting 56 points or 6.3% despite Gold’s best weekly performance (up 2.7%) in 4 months.  The broader equity markets also suffered with the TSX falling 3.8%, the Dow off 2.7% while the Nasdaq tumbled 4.5%.  Volatility is clearly on the upswing with the VIX breaking above its August high.

Obvious signs of a slowdown in global economic growth, which also triggered a substantial drop in Crude Oil prices below key technical support, was a major contributor to last week’s market woes.  Canadian markets are closed Monday for Thanksgiving but the U.S. returns to action Monday with bulls hoping for a shift in focus next week from the global economy, Ebola and geopolitical concerns to corporate earnings.  Major U.S. banks and technology companies are slated to report Q3 results.  This could help stabilize the markets and reverse the negative momentum.

The Venture, which has fallen in 25 out of the last 29 sessions, is caught in the grips of a severe technical breakdown with 3 key levels breached in just the last 18 trading sessions – 970, 920 and 860.  As we’ve mentioned previously, the ease with which the Venture sliced through those important and strong support levels is a worrisome sign and suggests there is a heightened risk of 1) a major correction in the broad equity markets, and/or 2) a plunge in Gold and/or commodities in general.

History shows that a sudden downtrend like this in the Venture often leads to a dramatic capitulation moment when fear spikes and frightened investors dump their holdings based purely on emotion, not common sense.  So it’s really critical for investors to stay level-headed at times like this, and also identify high quality opportunities that might be recklessly sold during the capitulation peak.

On an encouraging note, we remind readers that in times like this, fortunes are born.  It was in the depths – and in the aftermath – of the 2008 Crash when fortunes were made by many investors, and the same will hold true during this slide.  So this is no time to be discouraged.  Rather, it’s a time to really get to work and find special situations that have been knocked down – and may get knocked down even further – before their turn comes to soar. 

Below is a 9-month Venture chart that shows the 19.2% drop in 29 trading sessions.  Next major support levels are 800, 760 and 680.  Intense oversold conditions have emerged but that doesn’t mean a bottom in the Index has yet occurred.

CDNX344

The Seeds Have Been Planted (And Continue To Be Planted) For The Next Big Run In Gold Stocks

There’s no better cure for low prices than low prices. The great benefit of the collapse in Gold prices in 2013 is that it forced producers (at least most of them) to start to become much more lean in terms of their cost structures. Producers, big and small, have started to make hard decisions in terms of costs, projects, and rationalizing their their overall operations. Exploration budgets among both producers and juniors have also been cut sharply. In addition, government policies across much of the globe are making it more difficult (sometimes impossible) for mining companies to carry out exploration or put Gold (or other) deposits into production, thanks to the ignorance of many politicians and the impact of radical and vocal environmentalists (technology has made it easier for groups opposing mining projects to organize and disseminate information, even in remote areas around the globe). Ultimately, all of these factors are going to create a supply problem and therefore great opportunities for in Gold and quality Gold stocks – think about it, where are the next major Gold deposits going to come from?  On top of that, grades have fallen significantly just over the past decade.

Gold

Gold held critical support last week, and it’s interesting that the yellow metal was able to stay above its 2013 double bottom low during a record run of 12 straight weekly advances by the U.S. Dollar Index – a streak that finally came to end yesterday.

Chinese traders were back in the market mid-week following their Golden Week holiday, with strengthening demand for kilobars prevalent in the last couple of days, according to MKS (Switzerland). “Apparently onshore jewelry sales were brisk during this period so manufacturers have had more appetite to load back up on the metal. This has helped to stabilize Gold from the free-fall seen early this week and raise a hair of concern for short specs (speculators).”

Gold jumped $32 last week to close at $1,223.  Bullion has some work to do, however, as RSI(14) on this 6-month daily chart is now up against resistance while a band of chart resistance exists between $1,229 and $1,240.

GOLD200

Silver regained its footing last week and rose 55 cents to close at $17.40 (updated Silver charts Monday morning).  Copper finished unchanged at $3.04.  Crude Oil sank $3.80 a barrel to $85.82 while the U.S. Dollar Index full three-quarters of a point to 85.81.

The “Big Picture” View Of Gold

As Frank Holmes so effectively illustrates at www.usfunds.com, the long-term bull market in Gold has been 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, has had a huge impact on bullion and will continue to support prices.   Despite Gold’s largest annual drop in three decades in 2013, the fundamental long-term case for the metal remains solidly intact based on the following factors:

  • Growing geopolitical tensions, fueled in part by the ISIS terrorist group (air strikes won’t stop them) and a highly dangerous and expansionist Russia under Vladimir Putin, have put world security in the most precarious state since World War II;
  • Weak leadership in the United States and Europe is emboldening enemies of the West;
  • Currency instability and an overall lack of confidence in fiat currencies;
  • Historically low interest rates
  • Continued strong accumulation of Gold by China which intends to back up its currency with bullion;
  • Massive government debt from the United States to Europe;
  • Continued net buying of Gold by central banks around the world;
  • Flat mine supply and a sharp reduction in exploration and the number of major new discoveries.

Deflationary concerns around the globe and the prospect of Fed tapering had a lot to do with Gold’s plunge during the spring of 2013 below the technically and psychologically important $1,500 level, along with the strong performance of equities which drew momentum traders away from bullion. The June 2013 low of $1,179 was the bottom for Gold in our view. Extreme levels of bearishness emerged in the metal last year. With the long-term bull market remaining intact, we expect new all-time highs in Gold as the decade progresses. Inflationary pressures should eventually kick in around the globe after years of ultra-loose monetary policy and the reluctance of central banks to increase interest rates.

6 Comments

  1. Jon: where do you realistically see the ‘bottom’ in this TSX Venture market….things were ‘stable’ for a long time till September….also, what about 4th Q predictions?

    Comment by STEVEN1 — October 11, 2014 @ 8:18 am

  2. BMR – On an encouraging note, we remind readers that in times like this, fortunes are born. It was in the depths – and in the aftermath – of the 2008 Crash when fortunes were made by many investors, and the same will hold true during this slide. So this is no time to be discouraged. Rather, it’s a time to really get to work and find special situations that have been knocked down – and may get knocked down even further – before their turn comes to soar.

    Bert – Forgive me, but as always, i have to counter those, whom i consider
    as being over optimistic, without solid proof.

    BMR – On an encouraging note, we remind readers that in times like this, fortunes are born. It was in the depths – and in the aftermath – of the 2008 Crash when fortunes were made by many investors, and the same will hold true during this slide. So this is no time to be discouraged. Rather, it’s a time to really get to work and find special situations that have been knocked down – and may get knocked down even further – before their turn comes to soar.

    Bert – Forgive me, but as always, i must counter what i consider as too much
    optimism. No doubt, the carnage will eventually stop, but isn’t it possible
    the exchange will then just thread water for an extended period of time & those
    of us & no doubt, there are thousands, will be left stock shocked & may never
    again want to participate, or won’t be able to afford to place their cash, just
    to take a chance. Also, there’s the turmoil in the world, which no doubt, will
    continue & as a result, those who may afford to continue, will not want to
    participate, lump us all together, we are left with a smaller herd & being left with
    a smaller herd, leaves us with a Venture exchange, with no volume, which will be
    left marking time, day after day, week after week, month after month. I certainly
    hope BMR is correct, but if i were to bet $1,000.00 with Jon, to go to the winner
    of this mini debate, he might say, i am not a betting man.

    Comment by Bert — October 11, 2014 @ 9:36 am

  3. I messed up my on my last post, please start reading at the 3rd paragraph

    Comment by Bert — October 11, 2014 @ 9:38 am

  4. Steven, the Venture’s U-turn beginning on the first trading day of September is almost without precedent, all factors considered given the technical conditions that existed at the time, so anything from a sudden massive rally to a 100-day point drop are possible. The drop below 970, and particularly below the uptrend line at 920, were very negative signals and we’ve seen what has transpired since. Next major support is 800. Corrections of 30% or more over a brief period (20-40 trading days) have been witnessed before in the Venture, culminating in a tremendous buying opportunity. We’ve fallen through 3 critical support levels. There are 3 more. The bottom should be at one of those 3, either nearly 30 points from here or about 150. Which one is anyone’s guess. The healthiest thing for the market IMHO would be a very brief but severe plunge so that there’s confidence a true bottom, a real capitulation, has occurred.

    Comment by Jon — October 11, 2014 @ 11:41 am

  5. Just like to say Happy Thanksgiving everyone. I hope everyone has a wonderful time with their family and friends. Also like to thank Jon and the guys for all the great work they do. Anyhow, enjoy the day because on Tuesday we’re back in the madhouse. Let’s see what curveballs the market will throw at us this week.

    Comment by chris — October 12, 2014 @ 12:38 pm

  6. Ditto!! And also to you,Chris.

    Comment by Greg J. — October 12, 2014 @ 5:37 pm

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