"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, August 10, 2018

Gold $1,220 Resilient as Russian Ruble & Turkish Lira Tumble - Just Another Currency?

Refreshing memory for a hot August
Big Smoky Valley, Nevada

Friday, August 10, 2018 AM

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

Target Gold Price: $1,220 per ounce Target Silver Price: $15.3 per ounce.

Morning Miners!

"One fourteen - what!?" My first words this morning before my first coffee. You can buy a euro for only $1.14 - time to take a vacation to Europe, pardner - that's cheap. What happened?

The U.S. Dollar Index (DXY) responded to the euro's slip with a high not seen in 14 months (96.31). A strong dollar has become a big problem for commodities and emerging economies that took on too much dollar-denominated debt. Turkey is the poster child for this despair facing steel tariffs and sanctions from the U.S. to compound their debt problems. This week, the Turkish lira fell down the mine haft along with the ruble with Russia facing its own sanctions and tariffs.

Allen Sykora used my input in the Kitco Weekly Gold Survey

Richard Baker, editor of the Eureka Miner Report, also said gold is heading lower. “Gold finds itself just another embattled currency as the Turkish lira and Russian ruble tumble,” he said. “It has not demonstrated its usual safe-haven appeal as financial distress spreads in emerging-market economies. However, as the U.S. dollar index scores a level not seen since June of last year, the yellow metal has shown resilience around $1,220 level for most of August with only a few brief but scary dips.” [see full report below]

The $1,220-level still looks pretty good to me.

Commodity journalist Debbie Carlson interviewed the ole Colonel on gold prices recently. Some more of my thoughts are in this U.S. News & World Report column. 

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

Richard Baker, editor of The Eureka Miner, a metals newsletter, notes gold and the yuan have moved in lock-step since U.S./China trade tensions started escalating in March. China is a top global gold buyer with both its central bank and citizens keen purchasers.

"Currency devaluation is certainly in the PBOC (People's Bank of China) tool box to combat U.S. tariffs, the problem is how to do it without initiating capital flight," he says. "Their central bank may be calculating that a gold-based 'soft' devaluation is the best way to minimize capital leaving the country while delivering an effective trade counterpunch."

Please read the whole piece, Debbie Carlson has a gift for understandably consolidating an array of expert opinions on current falling gold prices.

More detail is given in my recent Kitco news column... 

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

...and input to this week's Kitco News Gold Survey below.

This mornings price action:

Comex gold (12/18 contract) $1,221.3 per ounce, 
Comex silver (9/18 contract) $15.345 per ounce
Comex copper (9/18/ contract) $2.7495 per pound

Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) and euro (EUR/USD) now begin to play a part too. You don't need to understand all the statistical gibberish on this chart to see the closeness of gold price to a gold model based on these currencies (note shaded 3-month area, click on plot for larger image):



"So goes the yuan goes, so goes gold."

Have a relaxing weekend - you deserve it!



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 but now appear to be leveling off. The July CPI reported this morning was up 0.2% for an annualized inflation of 2.9% (unchanged from June).


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% and now a 2.11%% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21, 2017 low.

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)

Comex copper is presently trading at $2.7495 per pound ($6,062 per tonne), now 17.5% below December's high with recent expectations for higher prices cooling. 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 have sent the red metal lower. However, copper price will probably miss bear bear territory (i.e. down 20%).

Total copper stored in LME and Nymex warehouses is 0.449 million tonnes, lower than last week and well below the 0.5 million tonne mark.

LME inventories are descending: 


It is instructive to keep our eyes on the Nymex inventories which are behind the LME and also falling (LME 249,150 versus Nymex 200,039 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 $1,220 per ounce. Target silver price $15.3 per ounce.

Gold finds itself just another embattled currency as the Turkish lira and Russian ruble tumble. It has not demonstrated its usual safe-haven appeal as financial distress spreads in emerging market economies. However, as the U.S. dollar Index scores a level not seen since June of last year, the yellow metal has shown resilience around $1,220-level for most of August with only a few brief but scary dips.

I have been pointing out the stunning correlation of gold with the falling Chinese yuan for some time. Adding the Japanese yen and euro to my gold/yuan model [above] leaves very little unexplained variance. Statistically, current Comex gold and FX levels suggest a lower bound of $1,204 per ounce and an upper bound of $1,227 in the near-term.

I believe it likely Comex gold will precariously hold the $1,220-level next week. Silver should follow in $15.3 territory. 

Encouragingly, gold has outpaced key commodities this week. Comparative value increases are 0.4% for copper, 1.5% for crude oil (WTI) and 0.6% for silver. [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 both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been dramatically weakening since mid-April.

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 above the 6.8-level at 6.8465 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 of 0.76% is coming in line with major currency levels and comparable to gold - something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.63% & 0.63% respectively; Comex gold 1-month volatility is a low 0.56%

Weekly Summary  for Aug 10, 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 floor price given the strong correlation with the depreciating yuan is  $1,220 with highs not exceeding $1,380 per ounce. Comex gold punched in a low of $1,210.7 7/19 (August contract), but I believe it likely that prices going forward will remain around the $1,220 floor (Contracts have rolled to December and gold made a new $1,212.5 low on that contract August 3. Forays below $1,220 have, however, recovered quickly).

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)

Note the recent fall in gold value for all three currencies: 

Click on the image for a larger size:


Gold in euro & yen terms with good margin above 2013 lows

Divergence resumes 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 126.79 yen per euro as the gold euro/yen spread resumes divergence.

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 August 8, 2018 (0.4260). Currently this AM the AUSP is at 0.4301 bearishly near the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines). 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

Friday, August 3, 2018

Jobs Report Bounces Gold $1,224; Good Progress at McEwen's Gold Bar (MUX)

"Louie's Lounge"
Main Street, Eureka, Nevada

Friday, August 03, 2018 AM

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

Miners Holding Steady In Face Of Lower Gold Prices -- McEwen (Kitco News, 7/18/2018)

Target Gold Price: $1,220 per ounce Target Silver Price: $15.4 per ounce.

Morning Miners!

If you were away all week, gold price is about where it was this time last Friday. The yellow metal is currently trading at $1,224.3 per ounce [please see Weekly Summary chart below].

Of course, you would have missed a whole lot of hullabaloo inbetween including a new low for the December Comex contract happening just a few hours ago - $1,212.5. Ouch!

A somewhat weaker-than-expected monthly jobs report this morning helped pull the lustrous metal out of that pot hole. The Labor Department reported 157,000 jobs were added in July, a much lower number than expected. However, before you get too worried, the same report revised June's jobs added up 24,000. The bottom line is the 3-month average is now a robust 224,000 jobs per month. The economy is in great shape. Headline unemployment is a low 3.9%.

Commodity journalist Debbie Carlson interviewed the ole Colonel on gold prices recently. Some of my thoughts are in this U.S. News & World Report column. 

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

Richard Baker, editor of The Eureka Miner, a metals newsletter, notes gold and the yuan have moved in lock-step since U.S./China trade tensions started escalating in March. China is a top global gold buyer with both its central bank and citizens keen purchasers.

"Currency devaluation is certainly in the PBOC (People's Bank of China) tool box to combat U.S. tariffs, the problem is how to do it without initiating capital flight," he says. "Their central bank may be calculating that a gold-based 'soft' devaluation is the best way to minimize capital leaving the country while delivering an effective trade counterpunch."

Please read the whole piece, Debbie Carlson has a gift for understandably consolidating an array of expert opinions on current falling gold prices.

More detail is given in my recent Kitco news column... 

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

...and input to this week's Kitco News Gold Survey below.

This mornings price action:

Comex gold (12/18 contract) $1,224.3 per ounce, 
Comex silver (9/18 contract) $15.460 per ounce
Comex copper (9/18/ contract) $2.7470 per pound

Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) now begins to play a part too. You don't need to understand all the statistical gibberish on this chart to see the closeness of gold price to a gold model based on these two Asian currencies (note shaded 3-month area, click on plot for larger image):



"So goes the yuan goes, so goes gold."

Let's hope the resumption of U.S./China trade talks and PBOC intervention to support their currency brings some strength back to gold and the yuan.

Have a relaxing weekend - you deserve it!



Good Progress at McEwen's Gold Bar (MUX)

MUX $2.23 per share

From a recent McEwen Mining (MUX) shareholder's update:

Construction of the Gold Bar Mine is on track for completion in 2018, and commercial production is expected to begin in Q1 2019. Activity at Gold Bar has reached full capacity with over 200 contractors on site daily. Open pit mine development is well underway and key process facilities are all under construction. 

Key progress since our last update: Commenced gold recovery plant structural steel and process equipment installation; Continued heap leach pad construction (+50% complete); First generator on site, two more will be dispatched in September; Crushing plant installation complete, conveyor installation continues; Continued mine waste stripping and ore stockpiling.

Some cool photos:

First generator arrival
Process Plant first steel
Process Plant progress
Liner progress
Pre-stripping pick West Pit

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 but now appear to be leveling off.


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% and now a steady 2.13% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21, 2017 low.

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)

Comex copper is presently trading at $2.7470 per pound ($6,056 per tonne), now 17.6% below December's high with recent expectations for higher prices cooling. 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 have sent the red metal lower. However, copper price will probably miss bear bear territory (i.e. down 20%).

Total copper stored in LME and Nymex warehouses is 0.456 million tonnes, lower than last week and well below the 0.5 million tonne mark.

LME inventories are in leveling off: 


It is instructive to keep our eyes on the Nymex inventories which are behind the LME and also falling (LME 251,950 versus Nymex 204,126 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 $1,220 per ounce. Target silver price $15.4 per ounce.

There have been a lot of new ingredients thrown in the gold pot this week with three central bank announcements, a U.S. labor report and acceleration of U.S./China trade tensions. Currencies remain the best way to test this bubbling brew - the U.S. Dollar index is just shy of a 12-month high as Comex gold scored a new 12-month low in the early hours. The Chinese yuan punched in a 14-month low before PBOC intervention and continues its unusually high correlation with Comex gold. 

The tight relation between gold and the Chinese currency began with escalating U.S./China trade tensions in late-March - both gold and yuan have plummeted in value since. It is important to also watch the Japanese yen which may weaken further as their central bank promises, "powerful continuous easing." Today's yuan at 6.83 USD/CNY is statistically consistent with $1,218 gold bounded by $1,233 above and $1,202 below. The December contract descent to a new low of $1,212.5 is within this range and may signal more pain is on the way.

A weaker-than-expected nonfarm payroll report pulled gold off its lows by not by much. Although the July 157K jobs was weaker-than-expected, a revised 3-month average of 224K indicates a strong economy and expectations the Federal Reserve will continue to raise rates soon after a their pause in hikes this week - another headwind for gold in a tame inflation environment.

I believe it likely Comex gold will again precariously hold the $1,220-level next week. Silver should stay in $15.4 territory. [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 both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been dramatically weakening since mid-April.

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 above the 6.8-level at 6.8309 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. An elevated 1-month yuan volatility of 1.03% remains above major currency levels and comparable to gold - something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.42% & 0.68% respectively; Comex gold 1-month volatility is 1.03%

Weekly Summary  for Aug 03, 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 floor price given the strong correlation with the depreciating yuan is  $1,220 with highs not exceeding $1,380 per ounce. Comex gold punched in a low of $1,210.7 7/19 (August contract), but I believe it likely that prices going forward will remain above a $1,220 floor (Contracts have rolled to December and this morning gold made a new low on that contract at $1.212.5 but recovered quickly above $1,220).

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)

Note the recent fall in gold value for all three currencies: 

Click on the image for a larger size:


Gold in euro & yen terms with good margin above 2013 lows

Divergence resumes 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 128.83 yen per euro as the gold euro/yen spread resumes divergence.

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 July 26, 2018 (0.4320). Currently this AM the AUSP is at 0.4353 bearishly below the downward trending channel (green/red dotted lines). 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

Friday, July 27, 2018

Gold Clings to $1,220 on Robust GDP; Red Metal Ready to Roar?

"Bovine Contentment"
Lone Mountain, Nevada

Friday, July 27, 2018 AM

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

Miners Holding Steady In Face Of Lower Gold Prices -- McEwen (Kitco News, 7/18/2018)

Target Gold Price: $1,220 per ounce Target Silver Price: $15.4 per ounce.

Morning Miners!

Copper may be in better pasture, gold is not.

From nearly entering bear country, the red metal has rebounded more than 5% from its July 19 low of $2.6735 (Comex Exchange). It got an additional boost this morning on a robust second quarter GDP of 4.1% - a growth rate not seen in 14 years. Although lower than some expected (4.2 to 5.0%), this is welcome news for a copper demand picture that has been shadowed by China's slowing economy and ongoing trade war with the U.S. 

Like gold, copper mining is facing rising costs and lower grades worldwide which will push prices higher on improving industrial metal demand. Nick Mather, CEO & managing director of DGR Global, believes the red metal is on the verge of a major breakout:

Copper is Hot Right Now (Kitco News Video, 7/27/2018)

So what about gold? Nuts.

Allen Sykora relayed my latest thoughts on the yellow metal in his Weekly Kitco Gold Survey:

Richard Baker, editor of the Eureka Miner Report, sees gold weaker, citing gold’s recent fall being in lock step with the Chinese yuan.

“This tight relation between gold and the Chinese currency began with escalating U.S.-China trade tensions in late March; both gold and [the] yuan have plummeted in value since,” Baker said. “Today's yuan above 6.8 USD/CNY is statistically consistent with $1,213 gold bounded by $1,228 above and $1,197 below. A retest of $1,210 is now likely suggesting more pain may be on the way if the correlation holds.”

Last week, I was fairly confident gold would skip a retest of its recent low; this Friday, I'm not as sure watching the yuan exceed the key 6.8 USD/CNY level (higher number = weaker currency). A floor of $1,220 seemed reasonable last Friday and will be my target price for next week - let's see what happens (my full report is given below).

Explaining why gold and the yuan are so intertwined is a real mystery. Commodity journalist Debbie Carlson interviewed the ole Colonel on this subject recently. Some of my thoughts are in this U.S. News & World Report column. 

What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)

Richard Baker, editor of The Eureka Miner, a metals newsletter, notes gold and the yuan have moved in lock-step since U.S./China trade tensions started escalating in March. China is a top global gold buyer with both its central bank and citizens keen purchasers.

"Currency devaluation is certainly in the PBOC (People's Bank of China) tool box to combat U.S. tariffs, the problem is how to do it without initiating capital flight," he says. "Their central bank may be calculating that a gold-based 'soft' devaluation is the best way to minimize capital leaving the country while delivering an effective trade counterpunch."

More detail is given in my recent Kitco news column:

The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)

This mornings action:

Comex gold (8/18 contract) $1,224.3 per ounce
Comex silver (9/18 contract) $15.460 per ounce
Comex copper (9/18/ contract) $2.7470 per pound

Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) now begins to play a part too. You don't need to understand all the statistical gibberish on this chart to see the closeness of gold price to a gold model based on these two currenies (note shaded 3-month area, click on plot for larger image, Update 8/03):



Let's hope the resumption of U.S./China trade talks and PBOC intervention to support their currency brings some strength back to gold and the yuan.

Have a relaxing weekend - you deserve it!



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 but now appear to be leveling off.


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% and now 2.13% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21, 2017 low.

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)

Comex copper is presently trading at $2.8140 per pound ($6,204 per tonne), now 15.6% below December's high with expectations for higher prices. 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 have sent the red metal lower. However, copper price may miss bear bear territory (i.e. down 20%) given today's robust GDP, rising mining costs and lower grades worldwide.

Total copper stored in LME and Nymex warehouses is 0.463 million tonnes, lower than last week and well below the 0.5 million tonne mark.

LME inventories are in decline: 


It is instructive to keep our eyes on the Nymex inventories which are behind the LME and also falling (LME 252,400 versus Nymex 210,608 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 $1,220 per ounce. Target silver price $15.4 per ounce.

Gold bearishly lost value this week compared to a broad set of assets including key commodities, domestic equities and major currencies euro and Japanese yen. This morning's robust second quarter GDP caused put further pressure on the yellow metal but a weaker-than-expected number kept it above $1,220 per ounce. 

An apparent easing of U.S./Europe trade tensions this week created an additional headwind for gold although resolution of trade wars with China are far from certain.

I believe it likely Comex gold will precariously hold the $1,220-level next week. Silver should follow in $15.4 territory.

It is perplexing that the fall in gold price and the Chinese yuan are in lock-step. This stunning correlation continues to improve on a 3-month basis [see updated chart above]. This tight relation between gold and the Chinese currency began with escalating U.S./China trade tensions in late-March - both gold and [the] yuan have plummeted in value since.

Today's yuan above 6.8 USD/CNY is statistically consistent with $1,213 gold bounded by $1,228 above and $1,197 below. A retest of $1,210 is now likely suggesting more pain may be on the way if the correlation holds. [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 both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been dramatically weakening since mid-April.

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 above the 6.8-level at 6.8197 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. An elevated 1-month yuan volatility of 0.99% is now above major currency levels - something else to watch compared to 1-month volatilities of euro, yen and gold.*

* the euro & yen 1-month volatilites are 0.40% & 0.80% respectively; Comex gold 1-month volatility has elevated to 1.14%

Weekly Summary  for July 27, 2018 AM 


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Yearly Summary for 2017


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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 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 floor price given the strong correlation with the depreciating yuan is  $1,220 with highs not exceeding $1,380 per ounce. Comex gold punched in a low of $1,210.7 Thursday 7/18, but I believe it likely that prices going forward will remain above a $1,220 floor (assumption being put to the test next week! Please see above discussion)

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)

Note the recent fall in gold value for all three currencies: 

Click on the image for a larger size:


Gold in euro & yen terms with good margin above 2013 lows

Divergence resumes 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 129.37 yen per euro as the gold euro/yen spread resumes divergence.

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 again December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661). Currently this AM the AUSP is at a new low of 0.4310 bearishly below the downward trending channel (green/red dotted lines). 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.