Today’s contribution in
our ongoing series on commodities prices and economic metrics is a study of
the relationship between the price of gold and the TSX Venture Exchange
(TSXV). The TSXV is the world’s foremost venture capital marketplace for
emerging nanocap companies. Our analysis begins with its inception in late
2001.
In response to the 1997
BRE-X scam that devastated the junior resource sector, the Canadian Venture
Exchange (CDNX) was created in late 1999 with merger of provincial exchanges
in British Columbia, Alberta, Toronto, and Montreal; it later added the small
Winnipeg Exchange. In December 2001, the CDNX was purchased by TMX Money
Group and renamed the TSX Venture Exchange. A weighted index was established
and opened on December 10 with an initial value set at 1000.
Our data set consists of
daily London pm gold prices posted by Kitco.com and daily TSX Venture
Exchange Index closing values posted by TMX Money. We have calculated monthly
averages for gold (red) and the TSXV Index (purple) and present
a composite chart below:
A perusal of patterns in
the price chart indicates that gold and the TSXV Index are positively
correlated most of the time. However, the Venture Exchange is much more
volatile with occasional rapid swings, parabolic rises and falls, and
significant spikes on both the up- and downsides. At various times, the Index
has foreshadowed substantial moves in the price of gold and at other times,
the opposite has occurred.
Here are the gold-TSXV
ratios covering a period of 201 months, i.e., three shy of 17 years:
The ratios are posted
below in a cumulative distribution chart, a table of intervals with their
percentage of the data set, and a histogram of the same.
Ratio intervals occur as
follows:
·Values from 0.2 to 0.3
comprise over 30% of the history and occur exclusively from December 2001
thru November 2007.
·Ratios from 0.3 to 0.4
occupy 9% of the data within two time frames: August 2002 to July 2003 and
December 2007 until June 2008.
·The broad interval from
0.4 to 1.0 represents over 17% of the months and also occurred during two
periods: July to November 2008 and April 2009 to August 2011.
·Another wide interval,
1.0 to 1.5, represents almost 22% of the data history and happened during
three months in late 2008 and early 2009 and then from September 2011 until
October 2014.
·Nearly 17% of the months
produce ratios from 1.5 to 1.9 with these values occurring from November 2014
to July 2015 and from May 2016 to the present.
·Ratios in the range of
1.9 to 2.3 comprise nine outliers in the data set from August 2015 to April
2016.
The relationship between
gold and the junior market is readily visualized using ratios of these two
metrics. Since inception, the overall pattern has been one of increase. They
ratios can be divided into five broad time segments that reflect this
paradigm:
·From inception until the
global economic crisis, the ratio varied from 0.2 to 0.4.
·It went briefly above
1.0 during the economic meltdown but soon dropped as a bull market for
commodities ensued and the Index soared. Ratios reached a low of 0.6.
·The Index spiked,
peaked, and fell in early 2011. Ratios steadily rose to 1.5 as gold continued
to remain relatively high until early 2013.
·When gold entered its
three-year bear market, ratios first dropped but then went exponential in the
fall of 2014 when the oil price collapsed. Au-TSXV peaked at over 2.3 soon
after oil, gold, copper, and the TSXV Index bottomed in late January 2016.
Ratios dropped as gold rallied during that year’s unusual summer doldrums
season.
·Since the late summer of
2016, the price of gold and the Index have moved in tandem and the ratio has
stayed uniformly high from 1.5 to 1.7.
Now let’s take a detailed
look into these broad periods. I will explain the behavior of Au-TSXV ratios
in context of macroeconomic factors, resource sector events, and overall
commodities markets.
The inception of the TSXV
and its index coincided with an incipient bull market for gold in early 2002.
The yellow metal rose with barely a pause from below $300 an ounce to
all-time highs over $1000 in the spring of 2008. During this period the
Venture Index increased concomitantly with gold albeit with more volatility.
Average monthly high values were well above 3000 in the spring and summer of
2007 with a peak day at 3370 in early May.
Throughout this bull
market, Au-TSXV ratios were uniformly low between 0.2 and 0.4 from December
2001 thru mid-summer of 2008, comprising nearly 40% of the data set.
Immediately prior to and
during the global economic collapse in the late summer and fall of 2008,
ratios rose rapidly, peaking at over 1.0 from December 2008 thru March 2009.
The Toronto Venture Exchange continued a year-long slide that began soon
after the Nova Gold failure in the late fall of 2007; it finally capitulated
at 700 and change in December 2008.
Gold followed suit,
although much less dramatically. It reached its nadir below $800 from
mid-October to mid-December as speculators sold anything liquid and
especially gold to cover margin calls.
The economic crisis,
financial machinations by Western governments, and a rapid recovery of the
commodities sector driven by a Chinese infrastructure build-out initiated a
new ratio paradigm. Gold went on another long bull run but the volatile
junior market index increased more rapidly. When the TSXV Index briefly
bounced above 2400 in early March 2011, the monthly ratio was below 0.6, a
level that has never been approached again.
Of course this TSXV
exponential rise begat a parabolic spike followed by an exponential fall. It
was spurred on by the Japanese earthquake and tsunami that resulted in the
Fukushima nuclear incident in mid-March. Gold peaked in September 2011 at
$1895 an ounce but remained high for over another year and a half.
Ratios increased
continuously from March 2011 until early 2013 the gold began its predictable
parabolic fall in April. An extended bear market in all metals ensued and was
exacerbated by the collapse in oil prices in the fall of 2014. Nearly the
entire ratio history from 1.0 to 1.5 is contained within in this time frame
and comprises almost 22% of the total distribution.
The oversupply of oil
weighed on all commodities including gold. But that was mild compared to the
Venture Index, which dropped like a rock. Heretofore unseen ratios above 1.5
ensued.
Gold had lost 45% off its
high by mid-December 2015, bottoming at a daily of $1049. Oil, copper, and
other metals hit their lows in late January 2016 and the Toronto Venture
Index drifted down to an all-time low at 476. Eight of the nine outliers in
our distribution, i.e., the interval from 1.9 to 2.3, occurred from August
2015 to April 2016.
Once the bottom was put
in for commodities in January 2016, a strong rally ensued in both the price
of gold and the TSXV Index value. Gold averaged $1097 per ounce in January
and $1341 in August. Meanwhile, the Venture Index average was 497 in January,
lagged gold in February, but rose 64% to 816 for August. Over these six
months, the ratio dropped from its all-time high of 2.3 down to 1.6.
Over the past two years,
both monthly gold ($1200 - $1335) and the TSXV (700 - 825) have been range
bound and their ratio has vacillated in a saw tooth pattern between 1.5 and
1.7. The only exception was when the Index popped to 890 in January of this
year prior to the collapse of cryptocurrency and marijuana stocks. These
sectors have recently become important components of the Index that was
previously the exclusive domain of resource stocks.
Both gold and TSXV
monthly averages were at 2.5-year lows in August at $1201 and 698 respectively
with a ratio of 1.7. Gold remains in the doldrums for September while the
Venture has gained a tad on higher volumes after Labor Day.
In conclusion, the
17-year history of the TSX Venture Exchange Index has largely reflected
trends in the price of gold. Although both are subject to parabolic rises and
falls, the Index is much more volatile given its standing as the world’s most
speculative venture capital market. Over the past year, it has become less
skewed toward resource sector stocks in favor of highly volatile
cryptocurrency and marijuana companies with bubble tendencies.
A common axiom among
brokers, financiers, and professional speculators is this: “As goes gold, so
goes the Venture”. Our research and analysis indicates this is often the
case.
With the price of gold
stuck in neutral and apparently dependent on a weaker US dollar to break thru
resistance at $1200 an ounce, the end of a junior resource bear market is not
in sight for 2018.
Ciao for now,
Mickey Fulp
Mercenary Geologist
Acknowledgment: Troy McIntyre is the research
assistant for MercenaryGeologist.com.
The Mercenary Geologist
Michael S. “Mickey” Fulp is a Certified Professional Geologist with a
B.Sc. Earth Sciences with honor from the University of Tulsa, and M.Sc.
Geology from the University of New Mexico. Mickey has 35 years experience as
an exploration geologist and analyst searching for economic deposits of base
and precious metals, industrial minerals, uranium, coal, oil and gas, and
water in North and South America, Europe, and Asia.
Mickey worked
for junior explorers, major mining companies, private companies, and
investors as a consulting economic geologist for over 20 years, specializing
in geological mapping, property evaluation, and business development.In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient, and is bilingual in English and Spanish. From 2003
to 2006, he made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is
well-known and highly respected throughout the mining and exploration
community due to his ongoing work as an analyst, writer, and speaker.
Contact: Contact@MercenaryGeologist.com
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