Navigating The TSX Venture, Gold and Bad Credit Markets.
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On August 12th in Volume # 281 titled, The SPDR Gold Trust Sets a Double Bottom, our team predicted the bottom had been set in the GLD. We predicted May 16th marked the low point for gold and that following August 12th, a new rally in the precious metal would take hold. The ensuing rally in gold has confirmed our belief that it remains in a long-term uptrend with a great shot at hitting record levels within three to six months.
Excerpt from our August 12th, 2012 Volume:
“The second bottom achieved on May 16, 2012 was less than 1% off the previous low from December 2011. Not coincidentally, it bottomed at nearly the identical price. GLD volume has been increasing this week and has confirmed to our team that gold is now back in its uptrend.
This is a significant double bottom and although it took almost a year of consolidation, gold is ready to advance further into September and we believe this to be bullish for the gold equities market.”
Read our report on the GLD by clicking here.
Gold is back in its uptrend, but still has some work (consolidation) to do before hitting new highs.
On August 12th, at the time of our prediction, the GLD closed at $157.18. The timing of our report on theGLD can be seen by the red arrow in the chart below. On October 4th, less than 2 months later, the GLD traded as high as 174.07, completing a rise of nearly 11%. Although that percentage gain may not raise eyebrows for many of us who play the junior resource market, it confirms that the GLD and gold remain in an uptrend which we believe will continue to historic levels.
Gold, and the GLD, have experienced some consolidation of late, but that is to be expected. Consider that since our August 12th report, gold went from $1,618 an ounce to a high of $1,791 on October 4th. Like any other market in the world, when quick gains are made, profit taking is inevitable.
And considering the rapid price appreciation, the pullback in gold thus far has been minor to say the least. Further consolidation down to $1,715 an ounce would not come as a surprise to us, nor would it change our opinion that the long-term trend for gold remains intact.
Update on The Venture
The TSX Venture faltered in the second week of October giving up more than 4% in as many days. The Venture’s 5 day chart is below. Unsurprisingly this week’s collapse rattled many investors whose minds are still filled with doubt the Venture will ever recover to its highs of 2011 (roughly 2400). While we don’t foreseethe Venture going back to 2400 anytime soon, 1800 isn’t out of the question and it represents nearly a 40% increase from today’s level.
TSX Venture 5 Day Chart
With several abrupt collapses for TSX Venture investors to recall over the past 5 years, it can be easy to misinterpret a healthy market correction for the beginning of a long drawn out collapse. Our team’s belief is that the TSX Venture is still the most attractive exchange, from a historical value standpoint, in North America.
On Friday, October 5th the TSX Venture hit 1,344.98, its highest level since May 14th 2012. As some of you may remember, the Venture crashed in mid-May losing more than 10% in one week. It has taken almost 5 months for the Venture to crawl back to its mid-May level.
Naturally, there are going to be bumps along the road as the Venture continues to prove it is the most volatile exchange in North America. It’s an invariable roller coaster of an exchange that interests all of us given the insanely cheap valuations right now.
Embracing the ride and finding ways to act and trade as a contrarian is the difference between winning and losing on the Venture. Investors must look for quality companies with proven assets and a healthy amount of cash on hand. Companies in need of capital in the near-term are in a tough spot as funding options remain tight and very selective. Cash is still king in this market, despite Bernanke’s intentions with QE3.
On October 1st, we issued Volume #284 titled, Credit Rating Downgrades are Coming. This past week Spain’s debt was downgraded.
Read our warning report on the coming downgrade of Spanish and US debt issued two weeks ago by clicking here.
Although the downgrade did minor damage to the major markets in North America, it definitely forced some investors to take risk off the table. This was evident in the TSX Venture, which got hammered last week.
The S&P cut Spanish debt from BBB+ to BBB-. Although BBB- is technically still investment grade, it is only one level above junk status. The S&P has given the EU and Spain a final chance to get its fiscal house in order. It warned of possible further downgrades to the EU nation.
Last month, the government of Spain unveiled its latest budget designed to create savings of around €13 billion or US$16.7 billion next year. The cuts will have the greatest impact to public sector wages, education, health and social services. It’s no wonder the citizens of Spain are revolting.
Spain will be receiving a massive bailout from the ECB or the European Financial Stability Facility. It doesn’t matter how you look at it; a lot of investors are going to be owed a lot of money and Spain doesn’t have the cash.
On October 1 2012, we wrote:
“Spain finds itself at the top of that list as Moody’s has said it may cut the country’s debt to “junk” status. If this were to occur, it would result in further cuts of its banks and several companies to junk.
This is something the ECB cannot stop. No matter how much debt the ECB or other countries buy from Spain, if its economy continues to flounder and no realistic path to repay its mounting debt is put forth, it will be downgraded. A downgrade would trigger a wave of selling from institutions who can only own bonds with investment-grade ratings.”
This waterfall of cheap money from the ECB, the Fed and other central banks provides investors with a clear and straightforward path. To escape inflation, one has to protect his or her investments with hard assets and with equities defining and producing scarce resources that cannot be manipulated.
Spanish bonds are still investment grade, similar to those sub prime mortgages that were ultimately worthless in the United States. If Spain receives a bailout and its debt is subsequently downgraded to junk, this will bring about a new and interesting situation.
Investors will realize that the EU is comitted to the eternal bail out of worthless debt for essentially bankrupted nations. This should usher in a new era for the gold bull market as the realization that it is a superior asset to the Euro, and all manipulated currencies, goes viral.
With the S&P beginning to stretch its legs, a downgrade will soon be on deck for the United States. This will likely come after the debt ceiling is hit and immediately raised by Congress. US National Debt stood at $16.17 trillion at the close on Friday, Oct 12th.
With only $220 billion left on the US credit card, before hitting the ‘debt ceiling‘ limit, uncertainty is increasing in the market. Be ready for this to rachet up the fear gauge and come to the forefront immediately following the election. Although this may have a short-term negative impact on equities, it will be tremendously bullish for gold and commodities just as it was in August 2011.
Upon the obvious outcome of Congress raising the debt ceiling, investors should prepare for gold to break out, potentially to new all-time highs.
All the best with your investments,