Friday, December 10, 2010

Chart of the Month: TSX-V Speaks Volumes - Gold Mania Still Ahead

Andrey Dashkov
Casey's International Speculator

With the gold price hitting nominal highs last month, there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling?

A bull market typically progresses through 3 phases: the Stealth Phase, in which early adopters start buying; the Wall of Worry Phase (or Awareness Phase), when institutions begin buying and every significant fluctuation makes investors worry that the bull market is over; and the Mania Phase when the general public piles on, driving prices beyond reason or sustainability.

This is followed by the Blow-off Phase, when the bear takes over from the bull and the herd gets slaughtered. Judging by the volume on the TSX Venture Exchange (TSX-V), where a lot of gold juniors are listed, we conclude that the next phase of our current gold bull market, the Mania, still lies ahead.

Have a look at the chart below:


If a mania were unveiling now, we would expect to see a sharp increase in investment capital entering the TSX-V, driving its trading volume upward. Over the last few months, the TSX-V daily volume has spiked upward sharply, but as the chart clearly shows, short-term volume is extremely volatile, spikes are common, and equally large drops are just as common.

Stocks of junior exploration companies are leveraged to gold, meaning they rise or fall by a greater percentage than does the yellow metal itself. So a spike in volume should be expected in reaction to an ascending gold price. A more reliable barometer is volume’s 10-period moving average that removes interim market gyrations. Using this measure, the TSX-V’s volume looks like it has returned to a slope of ascent similar to before the 2008 market crash, and the longer-term trend is steadily upward – steady being the key word.


More investors are entering our market, but the pace is not yet accelerating greatly, as we’d expect in a true Mania Phase. In other words, an early indicator of the mania in this bull cycle will be a sustained parabolic move upwards in the TSX-V’s average volume. And that is not happening yet.

Our other volume indicator, the GLD gold ETF, behaves in an interesting manner: it frequently moves counter to the TSX-V. An explanation for this might be that GLD is considered a “blue-chip” stock; a safer haven for investors who actively trade on the TSX-V and park their cash in GLD during periods when they consider juniors overly risky.

The moving average of GLD’s volume remains on a moderate multi-year ascent but has turned down recently. However, its daily volume is up in recent trading. Given the observed correlation between trading volumes of the TSX-V and GLD, this may point to a cooling-down in TSX-V trading activity in the near term.

Finally, the ^HUI gold miners index has tracked TSX-V volume as well, also having resumed a slope of ascent similar to that of the years before the 2008 crash. We see this as another indication that we are in an accumulation phase of the bull market.

We will continue tracking these parameters and updates when we see significant changes. For now, the bottom line is that even with the gold price moving sharply higher, the mania remains an anticipated future event.
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1 comment:

Anonymous said...

I'm in that gold community.. active in forums and the latest news... not once have I heard "there is a lot of “mania” and “bubble” ranting going on in the gold community. Should we start selling?"

Nice start to your column...
chris

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