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TSX Venture Exchange and Gold

The Thursday-Friday turnaround in both Gold and the Venture is highly encouraging, and confirmed the analysis regarding the RSI(14)-price divergence patterns we had pointed out a week ago.

After falling for 9 consecutive sessions and hitting a multi-year intra-day low of 746 Wednesday, the Venture reversed Thursday and then really kicked into gear Friday with one of its best single-day gains in a long time – a 19-point jump to finish the week at 770.  We’ll gladly take the modest three-quarters of a point weekly advance as that officially snapped a 9-week losing skid that wiped as much as 27% or 278 points off the value of the Index.

What’s next after the tumultuous activity since the start of September?

Technically – and keep in mind the technical picture is critical because the drop below key support levels in the 900‘s in September was advance warning of imminent trouble – a bullish engulfing reversal pattern Wednesday/Thursday was confirmed by Friday’s white candle.

Fundamentally, these are certainly very challenging times for the resource sector but we believe some rare opportunities have opened up these last few weeks in certain companies that are active with strong projects and have access to capital.  The commodity sector has been hit very hard since the summer, due to a variety of factors including the explosive move in the U.S. Dollar Index, but the greenback’s ascent appears to have temporarily stalled.  This will give commodities a good chance to rebound and emerge out of very oversold conditions.

Venture 6-Month Daily Chart

Last week we pointed out that the divergence between the Venture’s RSI(14) and price was curious, and cause for encouragement.  The new low in the Index was not confirmed by RSI(14) which hit extreme levels in mid-October.  In addition, sell pressure (CMF) has weakened considerably from its October peak and may now be ready to transition into buy pressure.  The evidence strongly suggests that selling – at least for now – has exhausted itself, and that was demonstrated by the action in the Venture Thursday and Friday.

This updated 9-month daily chart shows RSI(14) now slightly above 30 and showing some up momentum.  The 770 level is resistance – it’s also the 10-day moving average (SMA) – so a close above 770 early in the coming week is important.  -DI appears to have peaked.  The balance of probabilities suggests a greater chance of additional near-term gains in the Index as the recovery intensifies.

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 eventually create a supply problem and therefore great opportunities 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

What a week for Gold.  The yellow metal appeared to be one punch away from being knocked out around the middle of the week, but it’s always wise to be cautious of extreme sentiment in one direction or the other.  John gave a strong case for Gold holding support around $1,150, give or take $10 or $20, followed by a potentially sharp rally.  Indeed, Gold held at $1,130 and the sharp rally may have started in earnest Friday when it shot up $37 an ounce to finish the week at $1,178, a gain of $5 from the previous Friday.

How Gold behaves Monday/Tuesday is going to be critical – follow-through action to the upside is required next week to confirm a reversal.

This 5-year weekly chart shows a “hammer” – similar to that seen at other important lows over the last several years – so (possibly) things could get really interesting in the Gold market before the year is out.

Gold 5-Year Weekly Chart

Gold 6-Month Daily Chart

This short-term chart shows the extreme oversold RSI(14) conditions that recently emerged, mirroring the overbought RSI(14) conditions in the U.S. Dollar Index.  -DI has clearly peaked, which is a bullish sign.  The near-term key for Gold will be to push back above resistance at $1,200.

Silver bounced off key support around $15 and closed Friday at $15.83.  That was still a 35-cent loss for the week, but the move off $15 was impressive (updated Silver charts Monday morning).  Copper added a penny to $3.07.  Crude Oil fell another $1.89 a barrel to $78.65 while the U.S. Dollar Index reacted at the 88 Fib. resistance level, as expected, and closed Friday at 87.57.  That was a gain of three-quarters of a point for the week but it appears the greenback is ready for at least a minor consolidation to digest its large gains the last few months.  That, of course, would give relief to the beleaguered commodity sector.

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 – a “day of reckoning” will come’;
• 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. Deflationary concerns persist, and now Gold is having to grapple with a bullish U.S. Dollar.  However, we’re convinced that the 40% drop in Gold from its September 2011 all-time high is merely a healthy correction within an ongoing long-term bullish cycle that will take the metal to new all-time highs as the decade progresses.  There are many potential catalysts, including inflationary pressures that should eventually kick in, to power Gold to $2,000 and beyond within a few years.