"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Friday, December 14, 2018

Gold Dances Around $1,240; U.S Dollar Steps on Toes of Its Partner

"There's gold in them thar sand!"
Windfall Pit, Eureka, Nevada

Friday, December 14, 2018 AM

Target Gold Price: $1,225 per ounce Target Silver Price: $14.44 per ounce.

Morning Miners!

If you want to hear a fun song from 1931, click on the link under the headline photo. Don't step on your partner's toes!

Kind of a crummy week for the yellow metal. It was encouraging to see gold in the $1,250 neighborhood last week but it has since lost value compared to key commodities, major currencies and stock markets [See Weekly Summary Chart below].

The good news is that the moves down have been small and may reverse. The present culprit is the mighty U.S. dollar which got even more mojo after EU Central Bank Mario Draghi delivered a downbeat assessment on Europe economic prospects coupled with weak eco-data from China. Currently the U.S Dollar Index (DXY) is near 2-year highs.

There are a lot of gremlins in the latest witches' brew of gold drivers: U.S./China trade tensions, interest rate forecasts, political clouds Washington D.C. and geo-political tensions abroad. Oh, planetary alignments are probably in the mix too! 

This morning I explained the situation to Allen Sykora, editor of the Kitco Weekly Gold Survey: 

Richard Baker, editor of the Eureka Miner Report, listed a downside target around $1,225 an ounce. On the positive side, he pointed out that gold has had a bullish trend of higher lows, compared to the embattled S&P 500, since the end of September.

“However, renewed U.S. dollar strength with the euro dipping below the key $1.13 level this morning blunts the bullish trend relative to equities,” Baker said. “This morning gold and the S&P 500 are tracking lower together on concerns about slowing global growth and interest rate uncertainty. I believe it likely the dollar countervailing force will continue next week to drag gold to the $1,225 level, with silver following to $14.40 per ounce.” 

Further, he said, 10-year real rates are creeping above 1% even though the 10-year Treasury has fallen below 3%. “This is because inflation expectations are below 2% on a 10-year basis, canceling the normally bullish influence of lower interest rates on gold price -- another headwind for higher gold prices in the near term,” Baker said.[Full report can be found below]

Keep the faith! Gold will head back up the stairs before year's end.

This mornings' price action:

Comex gold (2/19 contract) $1,238.2 per ounce, 
Comex silver (3/19 contract) $14.595 per ounce
Comex copper (3/19 contract) $2.7435 per pound

Have a relaxing weekend - you deserve it!

Inflation Watch

Inflation expectations made a new 2018 high April 23rd above trend lines of higher lows (dotted lines, click on chart for larger size). But now those trend lines have been broken to the downside as shown in this chart:


10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2nd and then moved higher April 23rd to 2.18%. May 29th dramatically broke a trend line of higher-lows falling to 2.04%. This Wednesday expectations are much lower at 1.83%. The older trend lines of higher-lows are shown in dark blue. Those trends extend from June 21, 2017 low of 1.66%. Currently, we are back to the same expectation level as November 27th, 2017.

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

 Old Glory
Eureka, Nevada

Scorecard 

Here's a scorecard on where we stand with some of our favorite metals. 

Intraday highs on the Comex futures exchange: 

Gold $1,370.5 per ounce January 25, 2018 (April 2018 contract)
Silver $18.160 per ounce September 8, 2017 (Continuous chart))
Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)

Intraday lows on the Comex exchange:

Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)


Comex copper is presently trading down from last week at $2.7435 per pound ($6,048 per tonne), now 17.6% below December's high. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there coupled with a strong U.S. dollar have sent the red metal plummeting. Copper is very close to entering bear territory for a second time this year (i.e. down 20%). Latest China GDP numbers confirm economic slowing in the third quarter 6.5% (versus 6.6% expected) compared to 6.7% in the second quarter.

Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper in October:
  1. Freeport is a victim of the U.S.-China trade tensions which are prompting them and other mining companies to defer investments in new projects, and “that will add to this impending supply gap situation for the industry.” 
  2. He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”
Total copper stored in LME and Nymex warehouses is 0.241 million tonnes, more than one-half below the 0.5 million tonne mark of earlier this year. Interestingly, the Nymex warehouse tonnage now slightly exceeds the LME.

LME inventories continue declining after a run-up in August:



It is instructive to keep our eyes on the Nymex inventories which are no longer behind the LME but also falling (LME 120,803 versus Nymex 119,900 tonnes):



My Input to Kitco News 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

Target gold price $1,225 per ounce. Target silver price $14.44 per ounce.

Starting with a positive, gold has made a bullish trend of higher-lows in value comparison to the embattled S&P 500 since the end of September (ref: the gold-to-S&P 500 ratio). This comparison has been in a downward channel since the Presidential election, nearly 530 market-days.

The move from September has lifted gold value from the lower rail to nearly the upper rail. If the S&P 500 falls below 2,600 for any sustained time, this trend implies an ascent to $1,300+ per ounce; falling equities, rising gold. 

However, renewed U.S. dollar strength with the euro dipping below the key 1.13-level this morning blunts the bullish trend relative to equities. This morning gold and the S&P 500 are tracking lower together on concerns about slowing global growth and interest rate uncertainty. I believe it likely the dollar countervailing force will continue next week to drag gold to the $1,225-level with silver following to $14.40 per ounce.

Importantly, 10-year real rates are creeping above 1%* even though the 10-year Treasury has fallen below 3%. This is because inflation expectations are below 2% on a 10-year basis cancelling the normally bullish influence of lower interest rates on gold price - another headwind for higher gold prices in the near term./i>

[please see Weekly Summary Chart]

* real 10-year rate 1.06% (12/12); 0.96% (12/07) - source Bloomberg


Additional Note:

The fate of the Chinese yuan remains a key tell for gold and copper; a material drop in valuation could impact copper negatively. Something to watch: the yuan dramatically weakened from mid-April, stabilized and now appears on the move again to 7 USD/CNY.

The yuan stabilized below 7.0 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is near the 7.0-level at 6.9501 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility is 0.50%. Something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.38% & 0.40% respectively; Comex gold 1-month volatility is an slightly elevated 1.05%


Weekly Summary  for December 14, 2018 AM 


(click on table for larger size)

Yearly Summary for 2017


(click on table for larger size)

Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a  respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!



Gold Price Revised Outlook for 2018:

*** COMING SOON: 2019 GOLD PRICE FORECAST ***

My Comex gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. My latest revised range is a  $1,150 floor with highs not exceeding $1,380 per ounce. 

2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S.  Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion). 

The difference between interest rates and inflation expectations drives gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.

Here's the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in the middle of that range with prices just above $1,300 - a fair starting point [Gold bet won Thursday July 19]

Important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below). An explanation of the charts below is given in this Kitco News column:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Gold value for all three currencies is trending higher after a double-bottom for gold in U.S. dollar terms (August 17th & September 27th) 

Click on the image for a larger size:


Gold in euro & yen terms with margin above 2013 lows

Divergence has resumed for gold in terms of euro compared to yen:



Gold euro/yen spread widens again in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 128.24

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size:


Gold-to-S&P 500 Ratio

An important gold ratio is gold-to-S&P500 or AUSP. The ratio bottomed in early-December of 2015 and reversed to a bullish trend, peaking February 11, 2016 (0.6849). It bottomed December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661) and again September 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4705, maintaining an impressive gain above the September 27th low and approaching the upper rail (dotted green line). 

Cheers,

Colonel Possum & Mariana



Photos by Mariana Titus if not otherwise noted.

Friday, December 7, 2018

Gold $1,251 on So-So November Jobs Report - Up or Down from Here?

Markets come to a range gate
Eureka, Nevada

Friday, December 7, 2018 AM

Target Gold Price: $1,240 per ounce Target Silver Price: $14.58 per ounce.

Morning Miners!

I've been on vacation for the last six weeks and quite frankly haven't missed the roller coaster ride of these crazy markets. One good thing is that gold price is about where it was for my last report in late-October (Friday, 10/26) - near the mercurial $1,250-level.

It seems markets have come to a range gate and the key to unlocking it is either a thawing of tense U.S. China trade relations or a more gradual rise in Federal reserve interest rates...or both.

This morning I explained the situation to Allen Sykora, editor of the Kitco Weekly Gold Survey: 

...Richard Baker, editor of the Eureka Miner Report, looks for gold to pull back.

“At the release of a so-so jobs report, Comex gold made a six-week high, barely nudging above the key $1,250 level,” he said. “Does it move higher from here? It is instructive to note that in that same period, the yellow metal has gained about 1% in value relative to the embattled S&P 500 and copper prices are only 1% higher -- seemingly calm waters if we ignore the violent market storms in between. “This suggests that gold prices are at the top of a range that is unlikely to change until there is more clarity on the turbulent U.S.-China trade relations and the trajectory of U.S. Federal Reserve hikes next year.”

[Full report can be found below]

The monthly employment report wasn't bad this morning, just below economists estimates. The U.S. added 155,000 jobs in November compared to an expectation of 198,000. By a separate Labor Department survey, the unemployment rate hasn't changed from a quite low 3.7%. Some of the miss can be explained by weather and average hourly wages did advance 0.2%.

A so-so report boosted gold prices back to the $1,250-level on the logic that the Federal Reserve may not be as aggressive next year in raising rates. Consensus is that there will be one more hike this year to be announced this month.

How the U.S./China trade relations will fare after the 90-day "cooling off period" is anyone's guess which probably keeps gold in safe-haven mode for the remainder of the year.

What am I looking at for direction? Copper prices and strengthening of the Indian rupee are two good ones. Further discussion is given below.

Good to be back, keep the faith!

This mornings' price action:

Comex gold (2/19 contract) $1,249.2 per ounce, 
Comex silver (3/19 contract) $14.620 per ounce
Comex copper (3/19 contract) $2.7535 per pound

Have a relaxing weekend - you deserve it!

Inflation Watch

Inflation expectations made a new 2018 high April 23rd above trend lines of higher lows (dotted lines, click on chart for larger size). But now those trend lines have been broken to the downside as shown in this chart:

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2nd and then moved higher April 23rd to 2.18%. May 29th dramatically broke a trend line of higher-lows falling to 2.04%. This Wednesday expectations are much lower at 1.98%. The older trend lines of higher-lows are shown in dark blue. Those trends extend from June 21, 2017 low of 1.66%. 

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

 Old Glory
Eureka, Nevada

Scorecard 

Here's a scorecard on where we stand with some of our favorite metals. 

Intraday highs on the Comex futures exchange: 

Gold $1,370.5 per ounce January 25, 2018 (April 2018 contract)
Silver $18.160 per ounce September 8, 2017 (Continuous chart))
Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)

Intraday lows on the Comex exchange:

Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)


Comex copper is presently trading down from last week at $2.7535 per pound ($6,070 per tonne), now 14.4% below December's high. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there coupled with a strong U.S. dollar have sent the red metal plummeting. Copper is very close to entering bear territory for a second time this year (i.e. down 20%). Latest China GDP numbers confirm economic slowing in the third quarter 6.5% (versus 6.6% expected) compared to 6.7% in the second quarter.

Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper in October:
  1. Freeport is a victim of the U.S.-China trade tensions which are prompting them and other mining companies to defer investments in new projects, and “that will add to this impending supply gap situation for the industry.” 
  2. He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”
Total copper stored in LME and Nymex warehouses is 0.259 million tonnes, well below the 0.5 million tonne mark of earlier this year. Interestingly, the Nymex warehouse tonnage now slightly exceeds the LME.

LME inventories continue declining after a run-up in August:



It is instructive to keep our eyes on the Nymex inventories which are no longer behind the LME but also falling (LME 128,200 versus Nymex 130,864 tonnes):



My Input to Kitco News 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

Target gold price $1,240 per ounce. Target silver price $14.58 per ounce.

At the release of a so-so jobs report, Comex gold made a 6-week high barely nudging above the key $1,250-level. Does it move higher from here? It is instructive to note that in that same period, the yellow metal has gained about 1% in value relative to the embattled S&P 500 and copper prices are only 1% higher - seemingly calm waters if we ignore the violent market storms in between.

This suggests that gold prices are at the top of a range that is unlikely to change until there is more clarity on the turbulent U.S./China trade relations and the trajectory of U.S. Federal Reserve hikes next year. Importantly, 10-year real rates are also still around 1%* even though the 10-year Treasury has fallen below 3%. This is because inflation expectations have fallen in pace with Treasury yields blunting the normally bullish influence of lower interest rates on gold price. Equilibrium not excitement for gold going forward in the near term. 

 Accordingly, I believe it is likely gold will find comfort at the $1,240 per ounce-level next week with silver slightly lower at $14.58 per ounce.

One thing to monitor is the gradual strengthening of the Indian rupee relative to the U.S. dollar**. Falling below the 70-level (USD/INR) in the coming weeks could be bullish for gold and silver (fewer rupees for a dollar makes dollarized commodities more attractive for physical buyers).

[please see Weekly Summary Chart]

* real 10-year rate 1.03% (10/26); 0.96% (12/07) - source Bloomberg
** USD/INR 73.46 (10/26); 70.93 (12/07)

Additional Note:

The fate of the Chinese yuan remains a key tell for gold and copper; a material drop in valuation could impact copper negatively, gold is now moving in opposition to the yuan. Something to watch: the yuan dramatically weakened from mid-April, stabilized and now appears on the move again to 7 USD/CNY.

The yuan stabilized below 7.0 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is near the 7.0-level at 6.8750 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility is 0.48%. Something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.53% & 0.43% respectively; Comex gold 1-month volatility is an slightly elevated 1.04%


Weekly Summary  for December 7, 2018 AM 


(click on table for larger size)

Yearly Summary for 2017


(click on table for larger size)

Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a  respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!



Gold Price Revised Outlook for 2018:

My Comex gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. My latest revised range is a  $1,150 floor with highs not exceeding $1,380 per ounce. 

2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S.  Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion). 

The difference between interest rates and inflation expectations drives gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.

Here's the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in the middle of that range with prices just above $1,300 - a fair starting point [Gold bet won Thursday July 19]

Important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below). An explanation of the charts below is given in this Kitco News column:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Gold value for all three currencies is catching a leg higher after a double-bottom for gold in U.S. dollar terms (August 17th & September 27th) 

Click on the image for a larger size:


Gold in euro & yen terms with margin above 2013 lows

Divergence has resumed for gold in terms of euro compared to yen:



Gold euro/yen spread widens again in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 128.57

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size:


Gold-to-S&P 500 Ratio

An important gold ratio is gold-to-S&P500 or AUSP. The ratio bottomed in early-December of 2015 and reversed to a bullish trend, peaking February 11, 2016 (0.6849). It bottomed December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661) and again September 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4620, maintaining an impressive gain above the September 27th low. 

Cheers,

Colonel Possum & Mariana



Photos by Mariana Titus if not otherwise noted.

Friday, October 26, 2018

Gold Tests $1,240-level; Markets: "It's Getting Ugly Out There"

Major McCoy, Eureka's Mining Pioneer
Eureka, Nevada

Friday, October 26, 2018 AM

Target Gold Price: $1,250 per ounce Target Silver Price: $14.85 per ounce.

Morning Miners!

It has been a Clint Eastwood week. Let's start with the music:


If you are a gold miner it's been a good week with your lustrous product testing the $1,240-level three times (Comex Tuesday $1,243.0, Thursday $1,242.0 and today $1,241.2). Comex gold is currently trading a tad below at $1,237.6 per ounce. There is more upside ahead.

Gold in safe-haven mode has made substantial gains compared to the stock market, key commodities and major currencies. That's a World Series grand slam (see Weekly Summary Chart below).

Put these two thoughts together:
  • Noted economist Mohamed El-Erian said this week, "Global divergence creates volatility." 
  • Volatility is driving gold price.
That's a bullish scenario, pardner. This is how I explained this to Kitco News this morning:

Volatility and equity declines are now driving gold price. This is a typical safe-haven situation; what is unusual is the current closeness of the relation and the yellow metal's dramatic breakaway from the currency pack in October. 

From April to late-September, the Chinese yuan drove gold price with a lesser but supporting contribution from the euro and yen. Now stock market volatility is the key factor in gold's welcome rally. Gold continues this week with gains not only in U.S. dollar value but substantial advances compared to domestic equities, key commodities and currencies.

A one-month gold regression model based solely on the CBOE Volatility Index (VIX) and S&P 500 has a statistical error of only $7.81 per ounce (less than 1% error) [see chart at the end of this discussion].

Based on this model an upper bound for Comex price is currently $1,256.4 per ounce with a lower bound at $1,225.2. I believe it likely that gold will find the $1,250-level next week with silver following to $14.85 per ounce.

The rise of real rates in the U.S. remain a headwind for gold. Real rates retreated 5 basis points from last week on moderating inflation expectations but are still slightly above 1% on a 10-year basis.* If inflation can keep pace with the rise in nominal Treasury yields, gold should fare well going forward given uncertainties surrounding a slowing global economy, wobbly geo-politics and growing trade tensions.

* real 10-year rate is now 1.03% (last week 1.08%)

One more bit of good news is this morning's GDP data for the third quarter. GDP scored an annualized 3.5% compared to an expectation of 3.4 % indicating there is still a strong economy beneath all the fuss n' muss. Of course in the inverted logic of recent markets, strong growth implies more Federal Reserve interest rate hikes so the S&P 500 has another reason to be down today - good news is sometimes interpreted to be bad. 

Additional bad news IS the divergence of global markets on many levels due to differing central bank policies, U.S./China trade tensions, U.S/Saudi tensions, wobbly Italian Banks and a dicey Brexit resolution. A real witches brew.

For sometime, U.S. stock markets escaped much of the global turbulence and reached all time highs in September. 

Not anymore.

As commentator Sarah Eisen said this morning on CNBC Business News, "It's getting ugly out there!"

This morning the benchmark S&P 500 stock index plunged to 2,618.16, over 10% down from its September 21 high of 2,940.91 - ouch! [Update: closing at 2,658.69 down 1.73% for the day & down 9.6% from the intraday high in September].

Prices have recovered some, let's see where we close. The good, the bad and the ugly...

...or Christmas rally? Keep the faith!

This mornings' price action:

Comex gold (12/18 contract) $1,237.6 per ounce, 
Comex silver (12/18 contract) $14.705 per ounce
Comex copper (12/18/ contract) $2.7200 per pound

Here is a chart that shows how volatility is driving gold price within upper & lower bounds:


Gold Model based on the S&P 500 and CBOE Volatilty Index (VIX)

Have a relaxing weekend - you deserve it!

Gold/Currency relation kaput

As I noted last week, the gold/currency relation is kaput.

A picture tells the story. Here is my three-currency model (yuan, yen & euro) that had (until recently) very accurately tracked gold price (click on chart for larger image): 

Gold model based on the Chinese yuan, Japanese yen and euro currencies

Last week the error between actual and modeled value was nearly 6-standard deviations (6-sigma).  As I said, that's akin to aiming at a 100-yard target at the Windfall rifle range and hitting the top of the mountain!

Gold no longer travels with the currency pack and has returned to safe haven status in a troubled world.

Inflation Watch

Inflation expectations made a new 2018 high April 23rd above a  trend lines of higher lows (dotted lines, click on chart for larger size). After a sharp dip last on May 29th, expectations recovered, and moved more or less sideways. This week witnesses a dramatic fall below trend. Inflation rate is slowing.

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2nd but were surpassed April 23rd at 2.18%. May 29th dramatically broke the trend line of higher-lows falling to 2.04%. This decline recovered to 2.12%, retreated, recovered and then popped to 2.15% several weeks ago. This Wednesday expectations are a much lower 2.07%. The current trend line of higher-lows is shown in dark blue; older trend line, in light blue. Note that trend now extends to the June 21, 2017 low. This week's data plunged below trend, time for a trend update next week.

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

 Old Glory
Eureka, Nevada

Scorecard 

Here's a scorecard on where we stand with some of our favorite metals. 

Intraday highs on the Comex futures exchange: 

Gold $1,370.5 per ounce January 25, 2018 (April 2018 contract)
Silver $18.160 per ounce September 8, 2017 (Continuous chart))
Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)

Intraday lows on the Comex exchange:

Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)


Comex copper is presently trading down from last week at $2.7200 per pound ($5,997 per tonne), now 18.4% below December's high. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there coupled with a strong U.S. dollar have sent the red metal plummeting. Copper is very close to entering bear territory for a second time this year (i.e. down 20%). Latest China GDP numbers confirm economic slowing in the third quarter 6.5% (versus 6.6% expected) compared to 6.7% in the second quarter.

Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper this week:
  1. Freeport is a victim of the U.S.-China trade tensions which are prompting them and other mining companies to defer investments in new projects, and “that will add to this impending supply gap situation for the industry.” 
  2. He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”
Total copper stored in LME and Nymex warehouses is 0.313 million tonnes, well below the 0.5 million tonne mark of earlier this year. Interestingly, the Nymex warehouse tonnage now exceeds the LME.

LME inventories continue declining after a run-up in August:



It is instructive to keep our eyes on the Nymex inventories which are no longer behind the LME but also falling (LME 152,225 versus Nymex 160,483 tonnes):



My Input to Kitco News 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

Target gold price $1,250 per ounce. Target silver price $14.85 per ounce.

Volatility and equity declines are now driving gold price.

This is a typical safe-haven situation, what is unusual is the current closeness of the relation and the yellow metal's dramatic breakaway from the currency pack in October. From April to late-September, the Chinese yuan drove gold price with a lesser but supporting contribution from the euro and yen. Now stock market volatility is the key factor in gold's welcome rally. 

Gold continues this week with gains not only in U.S. dollar value but substantial advances compared to domestic equities, key commodities and currencies. 

A one-month gold regression model based solely on the CBOE Volatility Index (VIX) and S&P 500 has a statistical error of only $7.81 per ounce (less than 1% error). Based on this model an upper bound for Comex price is currently $1,256.4 per ounce with a lower bound at $1,225.2. I believe it likely that gold will find the $1,250-level next week with silver following to $14.85 per ounce.

The rise of real rates in the U.S. remain a headwind for gold. Real rates retreated 5 basis points from last week on moderating inflation expectations but are still slightly above 1% on a 10-year basis.* If inflation can keep pace with the rise in nominal Treasury yields, gold should fare well going forward given uncertainties surrounding a slowing global economy, wobbly geo-politics and growing trade tensions. 

* real 10-year rate is now 1.03% (last week 1.08%)

[please see Weekly Summary Chart]

Additional Note:

The fate of the Chinese yuan remains a key tell for gold and copper; a material drop in valuation could impact copper negatively, gold is now moving in opposition to the yuan. Something to watch: the yuan dramatically weakened from mid-April, stabilized and now appears on the move again to 7 USD/CNY.

The yuan stabilized below 7 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is now closing in on the 7.0-level at 6.9450 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility is 0.44%. Something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.62% & 0.61% respectively; Comex gold 1-month volatility is an elevated 1.41%


Weekly Summary  for October 26, 2018 AM 


(click on table for larger size)

Yearly Summary for 2017


(click on table for larger size)

Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a  respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!



Gold Price Revised Outlook for 2018:

My Comex gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. My latest revised range given the strong correlation with falling currencies compared to a strong U.S. dollar is a  $1,150 floor with highs not exceeding $1,380 per ounce. 

2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S.  Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion). 

The difference between interest rates and inflation expectations drives gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.

Here's the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in the middle of that range with prices just above $1,300 - a fair starting point [Gold bet won Thursday July 19]

Important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below). An explanation of the charts below is given in this Kitco News column:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Gold value for all three currencies is catching a leg higher after a double-bottom for gold in U.S. dollar terms (August 17th & September 27th) 

Click on the image for a larger size:


Gold in euro & yen terms with margin above 2013 lows

Divergence has resumed for gold in terms of euro compared to yen:



Gold euro/yen spread widens again in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 127.09 

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size:


Gold-to-S&P 500 Ratio

An important gold ratio is gold-to-S&P500 or AUSP. The ratio bottomed in early-December of 2015 and reversed to a bullish trend, peaking February 11, 2016 (0.6849). It bottomed December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661) and again September 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4585, continuing an impressive gain above the September 27th low. 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.