India to trade gold for Iran's oil?

A rumour has been doing the rounds that India is going to pay for Iranian oil using gold. The rumour was started by Debka.com.

It would be interesting and significant if oil exporters were starting to trade their oil for gold, but we are sceptical that the rumoured Iran-India gold-for-oil deal is true. One reason for our scepticism is the source of the rumour (we don't trust Debka.com). Also, it doesn't really make sense once you delve into the mechanics of such a trade.

There is a lot of gold in India, but India, the country, doesn't buy oil. The oil that is used in India is either bought by the Indian government or bought by private Indian companies. We can't imagine that large, private Indian companies would be keen to do deals with the Iranian government to swap gold for oil, so that leaves the Indian government.

The Indian government has a gold reserve of 615 tonnes, which at current market prices is the equivalent of about 300M barrels of oil. India's oil consumption amounts to about 3M barrels per day, so the Indian government has enough gold to meet the entire country's oil consumption needs for only a little more than three months. We don't know how far India's gold reserve would go if it only had to cover the oil consumption of the Indian government, but it seems unlikely that the Indian government would want to substantially reduce its gold reserve to obtain Iranian oil as long as it could easily obtain oil from elsewhere by paying US dollars.

There would also be logistical problems involved with India paying Iran in gold for a large quantity of oil, if we make the reasonable assumption that Iran would want to take delivery of physical gold.

One of the silliest comments we've read

First, money is simply the general medium of exchange, the supply of which does not have to increase for the economy to grow. In fact, the more stable the money supply the stronger the economy will be, all else being equal. The reason is that price signals will more accurately reflect real/sustainable changes in consumer preferences if the money supply is stable. By the same token, manipulating the money supply in an effort to keep prices stable will make price signals less indicative of real changes in consumer preferences and thus make the economy less productive. 

Second, economic progress naturally leads to lower prices. Is it a problem for the computer industry that people are able to buy much better computers at much lower prices today than they could 20 years ago? Of course it isn't! And would it be a problem if people could save money and be secure in the knowledge that their money would have more buying power in the future than it does in the present? Of course it wouldn't! The fact is that the last thing we need is to have a central bank ramping up the money supply in an effort to eliminate the benefits that savers and consumers would otherwise get as a result of increasing productivity.

Falling prices are good, but it isn't correct to describe the downward trend in prices that naturally stems from real economic progress as "deflation". To have genuine deflation there must be a contraction in the supply of money. Genuine deflation is possible under a fiat monetary system such as the one we currently 'enjoy', because when vast sums of money are created out of nothing it will always be possible for vast sums of money to be obliterated. However, genuine deflation would be virtually impossible if gold were money, because gold is a physical element that can be neither created nor destroyed by banks.

Gold Stocks

The HUI was weaker than expected over the first three weeks of the New Year, despite the combination of a buoyant stock market and a rising gold price having created ideal conditions for a gold-stock rally. Thanks to last week's declines in some of the senior gold stocks in response to downbeat 2012 production and costs guidance, the HUI is now roughly flat on the year. Furthermore, the HUI/gold ratio has just made a new 52-week low. The situation is illustrated below.



The breakdown in the HUI/gold ratio is a little disconcerting, as is the fact that the broad stock market's short-term risk/reward is now skewed towards risk.

On the positive side of the ledger, the junior gold stocks are showing relative strength and the Canadian Venture Exchange Composite Index (CDNX) has just closed above its 90-day moving average (MA) for the first time since April of last year. The significance of this particular MA crossover is described in the following excerpt from the 9th January Weekly Update:

"The 90-day moving average has, in the past, done a good job of defining intermediate-term trends in the CDNX. Following a multi-month decline, a break above the 90-day moving average (MA) has been a reliable signal that an intermediate-term rally is in its infancy. Breaks below the 90-day MA have been less reliable, but have still been useful signals about half the time.

The CDNX turned higher about three months ago, but remains below its 90-day MA. It needs to make a solid break above this MA to confirm that we are seeing the beginnings of a new intermediate-term upward trend rather than a counter-trend rebound."

A single daily close above the 90-day MA doesn't constitute a "solid" break, especially considering that the CDNX is still within the confines of its downward-sloping channel. However, the evidence is continuing to build that junior resource stocks, including junior gold stocks, have turned upward on an intermediate-term basis. 



We expect that HUI support at 490-500 will hold, but if the support is breached over the next two weeks there probably won't be much follow-through to the downside.

Gold

Here we go again

A few of our readers have expressed concern about a recent article posted by Clive Maund. The article's theme is captured by the following excerpts:

"...the price pattern that is forming in gold, and in silver, looks bearish in the extreme. As we can see on the 2-year chart for gold, a large bearish Descending Triangle has developed since it put in its highs, above a clear line of support at $1520 - $1530. Unless gold can abort the pattern by succeeding in breaking out above its descending upper boundary shown as the red trendline on the chart, then it is destined to break down, which will effectively mark the end of the bullmarket and this implies the onset, or rather the rather the [sic] rapid deepening, of the deflationary downwave that will then engulf many countries that have so far escaped its worst effects such as debt-wracked Britain and the US. If you want to know how bad it will get, you have simply to study what has already occurred in Greece and Spain - and it could get a lot worse than that with food shortages, riots, and cities going up in flames."

"...realization that the Large Specs may be "draining" ahead of a major bearmarket episide [sic] in gold and silver is just a theory, but it certainly fits with the ominous price patterns in gold, silver and the PM stock indices, and also with the horrendous outlook for 2012, which promises to be the year when deflationary forces, held at bay for so long, and magnified by further increases in debt and derivatives, wreak havoc upon world markets and economies."

Oh dear. Every time the gold market experiences an intermediate-term correction it is interpreted as a warning that a deflationary collapse is about to happen.

Rather than imagining how gold's price pattern could evolve and speculating on what it could mean from a fundamental perspective if reality ended up matching the product of our imagination, let's check some real-world fundamental evidence. The fact is that the year-over-year (YOY) rate of growth in US True Money Supply (TMS) is currently about 14%, and that December-2011 was the 36th consecutive month in which the YOY rate of TMS growth was 10% or more. If the YOY rate of TMS growth remains above 10% for two more months, which it almost certainly will, then it will be the longest period of double-digit money-supply growth in US history. To put it another way, the reality is that the US is in the midst of a record-breaking period of monetary inflation.

Could it be that the gold market 'knows' something, such as that the rate of monetary inflation is about to plunge? Based on past performance, the answer is no. Never before has the gold market been prescient in this regard. A classic example occurred during 1976-1980, when the gold price continued to rally for years after the monetary backdrop turned bearish. Another example occurred in 2005-2008, when gold was first slow to react to tight monetary conditions and then continued to fall for two months after the Fed began to flood the financial system with new money.

It should always be kept in mind that charts tell you what has happened, not what is going to happen. Chart patterns are often deceptive. It is not uncommon, for example, for a bullish-looking chart pattern to lead to a bearish outcome and for a bearish-looking chart pattern to lead to a bullish outcome. This doesn't mean that charts can't be put to good use, but the people using them should understand their limitations.

Gold and US$ Sentiment

We refer to the Forbes article posted HERE. The article's gist is that the outlook for gold mining stocks is bullish, but its first page contains comments from long-term gold bulls to the effect that a) there will probably be more strength in the dollar due to the problems in Europe, and b) the dollar strength could lead to significant additional weakness in the gold bullion price. For example:

"What we learned in 2011 was that when a Great Correction pinches, the dollar is the salve of choice -- not gold," wrote Bill Bonner on Tuesday. "When investors fear losses, they turn to the dollar for protection." They will continue to do so a while longer, Bill surmises: "We’ll probably see a further correction in the gold price...perhaps down to $1,200. Or perhaps it will stop at $1,400."

Is that really what we learned in 2011? Didn't we already know this based on the 2008 experience, logic, and the multi-year inverse relationship between the stock market and the Dollar Index? And don't we know that gold has proven to be a vastly superior safe haven over any period longer than 6 months and that gold usually only sells off during the initial leg of a 'flight to safety' trend?

We don't have any problem with predictions of more US$ strength and gold weakness. We just find it interesting that even long-term gold bulls and dollar bears are now expressing qualified optimism about the US dollar's prospects and concern about more corrective action in gold. Where was this US$ optimism when the Dollar Index was bottoming during April-August of last year? We view it as evidence that the US$ is nearing a short-term peak and that the gold price bottomed during the week before last.

It's important to understand that the US dollar's fundamentals are no more bullish and the euro's fundamentals are no more bearish today than they were 5 months ago. The only significant changes in the interim are prices and sentiment. This means that anyone who has recently become more bullish on the US$ is simply reacting to a dollar re-rating that has already happened.

As long as the fundamental drivers don't change, you should become more bullish as price declines and sentiment becomes increasingly pessimistic, and you should become less bullish (or more bearish) as price rises and sentiment becomes increasingly optimistic. That's what you should do unless you want to become financial market road-kill.

The grains and other agricultural commodities

An interview with The Speculative Investor

We were recently interviewed by Jeff Berwick of The Dollar Vigilante. For those who are interested, here is the link:
http://www.dollarvigilante.com/blog/2012/1/5/an-exclusive-interview-with-steven-saville-of-the-speculativ.html

Gold and Platinum

The price of platinum reached a major peak of around $2300/oz in the early part of 2008. The final spectacular surge to this peak was driven by the combination of the popular (but wrongheaded) notion that the Fed was about to immediately inflate the US$ into oblivion and a supply shock stemming from a power shortage in South Africa. Close to the price peak Market Vane reported that 95% of traders were bullish on platinum. Such high bullish percentages usually only occur when a market is in the process of making a price top that will hold for at least a couple of years.

The price of platinum subsequently tumbled as the supply problem proved to be short-lived, the US$ strengthened and the industrial demand for the metal collapsed in response to global economic weakness. By the final quarter of 2008 the platinum price was around $800/oz and Market Vane were reporting that only 16% of traders were bullish. In other words, almost all the traders who were eager to own platinum above $2000/oz in February of 2008 didn't want anything to do with it at $800/oz only 8 months later.

By August of 2011 the platinum market had rebounded to $2000/oz (within about 15% of its 2008 peak) on the back of massive monetary inflation, a moderate recovery in industrial production and a natural reaction to the 2008 'overshoot'. It has since pulled back to around $1400/oz, which is near the middle of its 6-year price range.

We don't know if platinum is cheap or expensive at around $1400/oz. Sentiment is constructive (Market Vane shows that only about 40% of traders are currently bullish), but if we are right to believe that much of the world is either in recession or about to enter recession then the industrial demand for platinum could decline markedly over the next 12 months. Also, although the platinum price has dropped back to the middle of its 6-year range, the upper section of the following weekly chart shows that it is still near the top of its 30-year range.

The main reason that our interest in platinum has recently been piqued is illustrated by the lower section of the following chart, which shows the platinum/gold ratio. Relative to gold, platinum is cheaper than it has been at any time since 1985 and is within 20% of its all-time low.



In less than 4 years the platinum/gold ratio has gone from one generational extreme to the opposite generational extreme, but we aren't interested in betting that platinum will strengthen relative to gold over the months/quarters ahead. The reason is that platinum's low stocks-to-flow ratio (the amount of aboveground platinum relative to the amount of the metal consumed in commercial processes) means that it is poorly suited for a monetary role. Gold, on the other hand, is extremely well suited for a monetary role. This difference between platinum and gold could eventually lead to gold trading at a much greater premium to platinum.

We would, however, be interested in owning platinum at the right price, most likely via the Physical Platinum ETF (NYSE: PPLT). There's a distinct possibility that platinum will get significantly cheaper relative to gold, but this would more likely happen as a result of a large rise in the gold price than substantial weakness in the platinum price. After all, even though platinum is ill suited to be money, a surge in the gold price on the back of increasing monetary demand for the metal would almost certainly bring about an increase in the speculative demand for platinum.

The right price is around $1200, or about $200 above long-term support at $1000.

Currency Market Update

Since all eyes are on the eurozone and the euro's reaction to the latest moves by Europe's politicians and central bankers, we thought we'd focus on the Canadian Dollar. The C$ peaked along with the stock market in July and then fell with the stock market to a bottom at the beginning of October. Interestingly, its performance over the past several months is similar to its performance in the months following the major stock market peak of October-November 2007. We have attempted to illustrate the similarities on the following chart.



If the similarities continue then the C$ will spend the next 3-5 months chopping back and forth, with the low end of its range defined by support at 95 and the high end of its range defined by resistance at 101. It will then break out to the downside and plunge.

We obviously don't know if the C$ will continue to follow a similar path to the one it followed during 2007-2008. A lot will depend on the timing of the stock market's next major decline. What we do know is that a daily close below 95 would create a lot of downside potential. Furthermore, the longer the C$ consolidates above 95, the greater the downside potential following a break below 95.

Returning to the euro, we continue to believe that the huge speculative net-short position in euro futures creates enough rebound potential to offset the short-term downside risk associated with the debt crisis. The short position doesn't preclude a final news-inspired plunge over the next few weeks, but it means that even if such a plunge eventuated the euro would quickly return to its current level or higher as the 'shorts' took profits.

The next scheduled event of significance is this Tuesday's FOMC Meeting. If the Fed announces some additional inflation-promoting measures at the end of this meeting then the euro could surge along with equities and commodities. 

As time goes by the markets are being influenced to an ever-increasing extent by the actions of policy-makers. This is good for speculators and bad for long-term investors.

Gold Stocks

There is always more than one way to interpret the price action in any market. For example, the contracting range drawn on the gold chart above is just one interpretation of what's happening in the gold market. Perhaps not surprisingly, a similar interpretation can be made of the XAU's price action. Specifically, and as illustrated below, the XAU's performance over the past three months can be viewed as a contracting range defined by sequences of declining tops and rising bottoms.

As is the case with gold bullion, the magnitude of any decline that followed a downside breakout by the XAU would probably be limited by the October low. As is also the case with gold bullion, the odds appear to favour an upside breakout from the contracting range with the early-September peak becoming a reasonable near-term target following such a breakout.



After the gold sector bottomed in early October, one plausible scenario involved the indices/ETFs dominated by senior gold miners (the HUI, the XAU and GDX) making a sequence of rising lows while the combination of tax-loss selling and risk aversion pushed the indices/ETFs dominated by junior gold miners (CDNX, GLDX and GDXJ) to a lower low during November or December. Up until now, however, the juniors have held up quite well. Some juniors have made lower lows over the past couple of weeks, but the indices and ETFs that act as proxies for the junior end of the gold universe have not weakened relative to the HUI since the early-October bottom. The juniors are therefore showing more relative strength/resilience than expected.

The full effects of tax-loss selling are yet to be seen, so it is certainly possible that the junior end of the market will become relatively weak over the coming fortnight. If so and if this weakness leads to high-potential juniors dropping to new lows for the year, it should be viewed as an excellent buying opportunity on both a short-term and a long-term basis. With regard to the short-term situation, high-potential juniors that get pushed downward by tax-loss selling during the first three weeks of December will stand a good chance of rebounding strongly during the final week of December and the first half of January.

Gold and Silver

Despite's the abnormal backdrop created by Europe's sovereign debt crisis, the euro-denominated gold price (gold/euro) has been behaving the way it normally behaves during an intermediate-term correction. If it continues to behave normally, that is, if the current correction follows a similar pattern to earlier corrections, then it will a) spend at least 6 more months between its September-2011 peak and its October-2011 trough, and b) meet up with its 200-day moving average before commencing its next major advance.



Silver traded at a new multi-week low on Monday and then rebounded on Tuesday, but neither of these moves looks significant on the daily chart displayed below. To show meaningful strength, silver would have to break above resistance at $33.50-$34.00. A break above this resistance would suggest a short-term target of around $39.

Our view, at this stage, is that a decline to $28 or lower would create a good buying opportunity.



Long-term and short-term traders of silver will need to be patient. At its current level in the low-$30s, silver is not high enough for short-term traders to sell and not low enough for short-term traders to buy. Given the risks and the likelihood (based on what happened during earlier corrections) that the next major advance won't begin before the second half of 2012, it is also not low enough for long-term traders to buy.

The Stock Market

The S&P500 closed right at the important 1216 support level on both Thursday and Friday of last week. However, the NASDAQ100 Index (NDX), which often leads the other senior US stock indices, broke below equivalent support at 2275-2300. This tells us that the odds are in favour of the S&P500 breaking below 1216 in the near future.



As stated in earlier commentaries, we think that the S&P500 will do no worse in the short-term than drop back to the low-1100s. The low-1100s for the S&P500 is equivalent to 2050-2100 for the NDX. To put it another way, we think that the remaining downside potential is less than 10%.

This has a lot to do with our assessment of market sentiment. To explain, it seems to us that it won't take much additional price weakness from here to push sentiment indicators back to the sorts of extremes that are only seen near important lows. For example, the VIX is currently in the low-30s and would probably move into the 40s if the stock market quickly lost another 5% or so. 

At the same time, it's unlikely that the stock market will rally for more than a few days as long as Europe's sovereign debt drama keeps generating a steady stream of bad news.

Due more to the lack of upside potential than the downside risk, our short-term stock market outlook remains "bearish". Our short-term view will automatically shift to "neutral", though, if the S&P500 drops to the 1150s and/or the NDX drops to the 2170s during the first three days of this week.

Gold Stocks

Below is a daily chart of GDXJ, the Junior Gold Miners ETF. GDXJ's rebound from its October low has been much weaker than that of the HUI.

The chart doesn't give any hints regarding the most likely direction of the next $3 move, but it does suggest that there is a significant risk of GDXJ testing its October low within the next couple of months.

Gold Stocks

Current Market Situation

The HUI has been rising via a two-steps-forward-one-step-backward process, which has enabled it to make significant upward progress without becoming 'overbought'.

The post-October-low pattern is still being followed, so there is no reason to alter our short-term expectations. Specifically, we continue to expect that a top will be put in place soon after the HUI's daily RSI(14) moves above 70.



The HUI's next multi-month top will probably be at or below the September top (640), but there is obviously a chance that it could be higher. If it is higher, that is, if the HUI breaks out to the upside, then we will pay closer attention than usual to the XAU.

As we noted in real time, the XAU's failure to confirm the HUI's break to new highs in September was significant. The XAU's failure to confirm the HUI's upside breakout in April of this year was also significant. In fact, it is generally the case that an upside breakout in the HUI will not prove to be sustainable unless it is led by, or quickly confirmed by, an upside breakout in the XAU. Therefore, if the HUI does make a new high we will be very interested to see the position of the XAU at the time.



Strategy Adjustment

It has been a tough year for holders of gold stocks, especially the holders of junior gold stocks. This is largely due to the shift away from risk that began in February and gathered momentum in May, but the fact that many gold producers have performed poorly at the operational level certainly hasn't helped. It seems, to us, that the quantity of companies announcing worse-than-expected results has been much higher than normal this year. In some cases the bad news was solely the result of bad luck. Agnico Eagle's forced closure of a profitable mine due to ground instability, for example. In the majority of cases, however, the cost overruns and/or production shortfalls appear to stem from sub-par management.

Conventional wisdom has it that one of the best times to buy or own the stock of a gold mining company is just after the company goes into production, but the record of the past few years tells the opposite story. The historical record points to the time window around a new mine going into production as being a high-risk period for shareholders, because for every mine that starts up roughly according to plan there are at least two mines that experience major teething problems. Furthermore, sometimes these so-called teething problems continue for years.

Due to the lessons learned from our past experience with junior mining stocks, in the future we will do our best to steer clear of companies that are close to bringing their major asset into production. In the future, we will focus primarily on the stocks of mining companies that are in one of the following two situations:

1) Flagship project in the exploration or development phase, with a long time (at least 1-2 years) to go before production

2) Flagship project in production and performing to plan. (Note: Some mines perform well for a while and then experience major problems, but this is relatively rare. In most cases, a mine that has performed well for at least a few quarters will continue to perform well.)

Not 2008, but possibly 2007

In prior TSI commentaries we explained why a 2008-style crash was very unlikely during 2011. For example, in the 15th August Weekly Update we wrote: "Thanks to the Keynesian policies implemented over the past three years, the economic problems are now worse than they were just prior to the 2007-2008 financial crisis. This is a good reason to be bearish on the economy and to tread very cautiously when speculating in equities, but it isn't a good reason to anticipate the sort of widespread panicked de-leveraging that occurred in 2008. The primary reason is that the monetary backdrop is completely different today than it was three years ago."

This year actually has more in common with 2007 than it does with 2008. We recall that in 2007 there was a crisis in the subprime mortgage market that led to a couple of sharp stock market declines and short-lived spikes in fear throughout the financial world, prompting policy-makers to cobble together programs that would supposedly fix the subprime problem and ensure that the rest of the credit market remained on an even keel. Most investors and speculators believed that the support programs would work, as evidenced by the fact that in early November of 2007 the senior stock indices were at or near multi-year highs. We recall, as well, that in October-November of 2007 the corporate earnings backdrop was still positive and most analysts were forecasting continuing growth in earnings over the ensuing 12 months.

The euro-zone's debt crisis could be the 2011 equivalent of 2007's subprime debt crisis. Over the past 6 months, policy-makers in Europe have been busily putting together support programs that purportedly make the debt more manageable and prevent the crisis from spreading. As was the case four years ago with regard to the subprime crisis, a general belief is now taking hold that the newly enacted policies will succeed and that a bigger crisis will be averted. As was also the case during the final months of 2007, the corporate earnings backdrop is still positive and most analysts are -- wrongly, in our opinion -- forecasting continuing growth in earnings over the next 12 months.

If 2011 is similar to 2007, does that mean that 2012 will be similar to 2008?

No. We suspect that 2012 will turn out to be a bad year for the stock market and most industrial commodities, but it's very unlikely that the next global crisis will be a repeat of the last one.

Currency Market Update

Europe's Crisis

As far as we can tell, there are five possible 'solutions' to the euro-zone's sovereign debt problem:

1. Greece leaves the euro zone and returns to using the Drachma, with the Drachma pegged to the euro. The Greek government re-denominates all of its obligations in Drachmas and then defaults by substantially devaluing the currency.

2. Germany leaves the euro zone, paving the way for a substantial devaluation of the euro that reduces the real value of all euro-denominated debt.

3. No country leaves the euro zone and no government directly defaults on its debts, but the ECB embarks on a massive debt monetisation program that substantially reduces the real value of all euro-denominated debt. In other words, all euro-zone governments indirectly default.

4. Greece stays in the euro zone and directly defaults on its debt, resulting in the holders of Greek government bonds taking "haircuts" of 50%-80%. Some other heavily-indebted euro-zone governments also default, with bondholders taking "haircuts" of varying sizes. Most of the commercial banks that would otherwise have gone under as a result of the losses stemming from these defaults are kept in business by the combination of the ECB, the EFSF and the financially-strongest governments.

5. The same as 4, except that commercial banks are not bailed out.

Solution 5 is the most sensible from an economic perspective, but solution 4 is the most likely because large commercial banks are a protected species. Solutions 1 and 2 would be very messy, and the German government would not go along with solution 3.

Solution 4 would probably lead to a few months of euro weakness, but the euro would remain a viable currency.

Current Market Situation

On 4th October we downgraded our short-term US$ outlook from "bullish" to "neutral" in anticipation of a correction. The likely extent of the correction was addressed in the 5th October Interim Update, when we wrote:

"Once the Dollar Index commences an intermediate-term advance, the 50-day moving average generally acts as support during pullbacks. The 50-day moving average is currently at 75.7, but it is rising and should roughly coincide with lateral support at 76.5 in a few weeks time. We therefore view 76.5 as a reasonable downside target for a near-term correction and will return our short-term US$ outlook to "bullish" if the Dollar Index trades below 77."

The Dollar Index traded as low as 76.8 and closed at 76.99 on Wednesday 12th October, so our short-term US$ outlook has returned to "bullish". We are also upgrading our intermediate-term US$ outlook to "bullish", as the past week's decline is likely just the first significant pullback in a rally that will continue for at least a few more months.

Based on the historical record, the dollar's short-term downside from here should be limited by support at 76.0-76.5.

Tax Loss Selling

Tax-loss selling can affect stocks of all sizes during the final two months of the year, but the effect is most apparent within the ranks of small/micro-cap stocks. The reason is that when it comes to small and relatively illiquid stocks, a minor change in supply or demand will tend to have a disproportionately large effect on price.

Tax-loss selling is, as the name suggests, the taking of losses on stocks in order to realise a loss that can be used to reduce the investor's overall tax bill. Therefore, it mostly affects stocks that are substantially lower during the final two months of the tax year (November-December in the US and Canada) than they were at the beginning of the year, and tends to be most noticeable during years when the average small-cap stock has a large year-to-date decline going into the final two months of the year.

2008 provides us with a very clear example of the effects of tax-loss selling on the small- and micro-cap stocks. As evidenced by the above chart of the HUI's performance in 2008, the senior gold stocks bottomed in October, successfully tested their October lows in November and were (on average) 100% above their October lows by mid December. The average small/micro-cap stock, on the other hand, plunged to a new low for the year during November of 2008 and in mid December was still well below its October low. This is evidenced by the following chart of the TSX Venture Exchange Composite Index (CDNX). The CDNX didn't begin to rally in a meaningful way until the final few days of December-2008.



The CDNX's current situation is shown below. This year's decline has been a lot smaller than the 2008 decline, but the CDNX is down by enough on a year-to-date basis for tax-loss selling to have a material effect at the junior end of the mining sector during November-December.



We suspect that some junior mining stocks have already bottomed and will be substantially higher by year-end, but don't be surprised if tax-loss selling causes others to remain under pressure until late December.

Downward pressure stemming from tax-loss selling will create buying opportunities for cashed-up speculators.

Currency Market Update

In the 13th July Interim Update we discussed the way the Dollar Index normally makes an intermediate-term bottom and showed charts of all previous intermediate-term bottoms over the past 25 years. The historical examples suggested that a strong US$ rally would begin by mid August at the latest. As it turned out, a strong US$ rally didn't begin until the end of August.

The historical examples point to an important US$ peak during December or January. 

To arrive at an educated guess as to the level of the coming peak, we consulted the weekly chart displayed below. The top section of the chart shows the Dollar Index and a moving average (MA) envelope. The bottom section shows the Dollar Index's 52-week rate of change (ROC).

Apart from 2008, when the Dollar Index moved well above the top of its MA envelope before reaching a short-term peak, all other significant US$ rallies have made short-term peaks at, or marginally above, the top of the envelope. This suggests a target of 82-83 for December-January. However, that would move the 52-week ROC to no higher than +5%. No intermediate-term US$ peak over the past 25 years has occurred with the 52-week ROC below 10%, so a rise to the low-80s over the next few months would likely create a short-term peak but would likely not bring the intermediate-term advance to an end.