With a new year blooming the general stock markets appear to have shaken off the uncertainties with Europe and the recession fears of last year. The large-cap S&P 500 (SPY) has gained about 20% since the October lows.
The riskier small-cap resource explorers and developers in the (TSXV) Venture have gained roughly a similar amount. And most remarkably, the silver ETF (SLV) and the gold ETF (GLD) stayed about equal over this same time period.
My supposition is that risky Venture stocks are driven by two things. The first driver is metals prices as measured by the prices of Gold and Silver as a proxy. Higher metal prices make the deposits of these juniors worth more. The second driver is the risk appetite of the general market as measured with gains from the S&P500. The idea is that as the S&P 500 gains, investors feel wealthier and move some money into riskier propositions, small-cap stocks, and some money may come to these Venture resource stocks.
This thesis may be seen in action on the following chart of the SPY ETF compared with the TSXV, SLV and GLD ETFs.
(Click chart to expand)
I know the TSXV trace looks spectacular in almost gaining over 40% since the October lows, but really, who can pick these lows? So for argument's sake, the gains should be 20%, similar to the gains of the S&P 500. The chart looks complex at first sight, but it is not really. The candlesticks are the trace of the TSXV ETF (a proxy for the Venture Exchange Index). The blue trace is the SPY (proxy for the S&P 500). The yellow trace is for the GLD and the white trace is the SLV.
Here is my reading of the above chart. The SLV and GLD ETFs move roughly in parallel with the SLV going higher than the GLD in the rises and also going lower than the GLD in the dips. The SLV appears to be the leader of the two and made a remarkable rise last week. At the beginning of October the SPY moved higher for the month until November. November saw a spate of portfolio balancing, and the SPY held steady at the beginning and declined toward the end. In December the SPY moved upward and downward until the last week. Then the SPY powered higher with buying for the new year until now, where there have been gains of about 20% since the beginning of October.
The GLD and SLV ETFs both moved higher in October. The twin forces of the general market movement upward and the rising precious metals prices caused the TSXV to explode spectacularly upward in October and until mid-November. The GLD and SLV both declined until year-end. Then with GLD and SLV falls and the re-balancing and tax write-offs, the TSXV fell until near year-end. In the new year, the TSXV has been rising, driven by both a rising SPY and the SLV and GLD rising prices. As both the SPY and the GLD and SLV drivers are rising, the TSXV should be headed higher into this year.
Markets Slow with Low Volumes
Bloomberg recently carried a story on how the trading volume in the markets is low, "Volume is decreasing even as data suggest the American economy is recovering," reporting that there is a lot of money waiting outside the markets, implying a false move upward. I am of another opinion and more inclined to think that the money that is still outside the markets will come back in soon, giving the markets further support moving higher.
Support for Precious Metals from the Fed
On January 25, the U.S. Fed announced that interest rates will continue at these low levels, well into 2014. This was good news for the precious metals as they spiked on this announcement. David Alton Clark has a good article about this here.
I am an investor in the small-cap resource stocks that are usually listed on the Venture exchange. From the looks of things with both the general markets moving higher and possible higher prices for gold and silver, supported by low interest rates, this may be an opportune time to take a position in the riskier small-cap resources stocks. As for which resource stocks, I am partial to the silver metal as the leader and the smaller silver explorers and developers as detailed here.
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