Gold Rebound $1,064 - Where's Santa?

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What do copper & gold signal for 2016? (by Richard Baker, Elko Daily Free Press, 12/03/2015)

Timberline Provides Update on Proposed Acquisition by Waterton Precious Metals Fund II Cayman, LP (Press release, 12/03/2015)

General Moly Announces Closure of $4 Million Tranche 1 Equity Investment with AMER International (Press release, 11/30/2015)

Mining Quarterly

The latest online version:

Winter 2015 Mining Quarterly

"Click to read" and the online version looks much like the printed magazine. My column on copper and gold prices for 2016 starts on page 85 (page 82 printed version). Press "Esc" to return to the Elko Daily Free Press. There is a handy scroll bar for page selection at the bottom of the screen. The same article appeared in the Elko Daily Free Press December 3:

What do copper & gold signal for 2016? 

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Numbers used for analysis (morning, 12/18/15):

Goldman Sachs Commodity Index

S&P GSCI 307.85, 01/16 contract (intraday low 304.35, on 12/18/2015)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $36.39 per barrel (intraday low $35.72 on 12/18/2015)

Brent crude $ 37.07 per barrel (intraday low $36.41 on 12/18/2015)

Comex copper $2.1055 per pound (intraday low $2.0020 on 11/23/2015)

Comex gold $1,063.5 per ounce (intaday low $1,045.4 on 12/03/2015)

Comex silver $14.045 per ounce (intraday low $13.620 on 12/14/2015)

Canary in the gold mine: Fate of high yield corporate bonds (see explanation below)

iShares iBoxx $ High Yield Corporate Bond (HYG) $79.38 ($78.21 52-week low)

Trouble ahead: HYG < $82...yikes, we're there!

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Gold Rebound $1,064 - Where's Santa?

Trouble indicators blinking

Macro drivers: continued concerns about China; U.S. Federal Reserve interest rate trajectory for 2016 & 2017

Wild cards: Fate of high yield bonds, Further oil price decline

Gold bet for next week: pause in $1,060 territory

Merry Christmas Miners!

The markets were so bad last Friday that I decided to delay a report until things got better - they have, a little. December usually enjoys a "Santa Rally" to close the year. Looks like we're still several reindeer short of full team on a pretty rickety sleigh.

One big hurdle is behind us - the Fed's long awaited raise of the benchmark interest rate. Now the question is how many more in the next two years and how big. Expect more volatility as our central bank tightens and others loosen to stimulate moribund economies abroad. This monetary policy divergence supports the U.S. dollar but is not a happy world for our favorite metal. As the U.S. dollar strengthens, it becomes more expensive for foreigners to buy gold in their home currency. From an investment standpoint, The Lustrous One finds itself with few friends for the holidays as money seeks greater reward elsewhere.

What about that lousy Friday?

Every market morning, I record and analyze 22 market parameters including key commodity and stock prices, major currencies and indices. There are many, many more but that's about all the ole Colonel can track without seeing double.

For each parameter, I set a threshold value to signal trouble ahead or blue skies above. Here's  a list of 9 lights that flashed red at last Friday's close:

WTI (close) = $35.62 < $40/bbl: Nymex oil at new 7-year low
BRENT (close) = $37.93 < $ 40/bbl: Global benchmark Brent crude at new low
NG = $1.990 < $2/mmBTU: Natural gas futures tumble below $2 and it's almost winter!!
GSCI (close) = 313.95 : Goldman Sachs commodity Index at new low, similar Bloomberg Commodity Index at a 16-year low
HYG = 79.53 < 82: High yield bond market in trouble (see "What's Got the Cat Worried" below)
S&P 500 (close) 2,012.37 < 2,032: U.S equity markets plunge into dangerous waters (the S&P 500 has bearishly fallen back into the "fib" box, see "Market Stats" below)
VIX = 25.35 > 20: S&P 500 Volatility Index jumps26%, often referred to as the "fear index"
USD/RUB = 70.60 > 70: Russian ruble in trouble again
USD/YEN = 120.97 < 122: Japanese yen strengthens to early-November levels (see "Chart to Watch" below)

Ouch!

This morning the "fear index" is lower but just barely under threshold at 19.27. A rally in stocks earlier in the week stalled and we are about 10 points above last Friday (2,025.42 vs 2,012.37). Nymex, Brent and natural gas have punched in lower lows and so have the broader commodity indices. Currencies have stabilized some but the U.S. dollar is trading up from last week. Finally, the fate of the high yield bond market is still keeping market participants on edge.

So what got better in a week? We heard from the Fed on Wednesday - a big uncertainty is now in the rear view mirror. I wouldn't be surprised to see markets on an uptick next week with the S&P 500 closing at 2,100 for the year. What about gold? Here's what I told Kitco News this morning (full input to the Weekly Kitco Gold Survey below):

After Wednesday's U.S. Federal Reserve rate hike, gold is fast approaching its 2013 lows in both euro & yen terms. Gold finds itself just another embattled currency caught in the divergent dynamic of U.S. monetary policy compared to that of the the ECB and Bank of Japan.

My continued fear is that gold losing value to these major devalued currencies signals more near-term downside in US dollar terms, perhaps less than $1,000 per ounce.

On the positive side, gold has now defended two recent excursions below $1,050 per ounce so the trend lower may find some relief next week. My target price is, however, slightly below this morning's price (10:55 AM EST $1,063.9 per ounce).

My vote is down. Target price $1,060 per ounce.

Nuts. Stay tuned.

What's Got the Cat Worried?

This report continues to carry this link to remind us of some potential bumps in the road ahead. Activist billionaire investor Carl Icahn explains why high yields are a scary indicator in this chilling video:

Danger Ahead

We have now crossed the worry threshold (HYG < 82). Please be mindful that Icahn is talking his own book (he is short of high yield bonds). He has also recently invested significantly in Freeport-McMoRan (FCX) which this report views as a positive.

Chart to Watch

Gold price margins from 2013 lows (euro, yen)

A disturbing aspect of gold's recent decline in USD is the concurrent collapse in euro and yen terms.

One of the few accomplishments the yellow metal can boast is staying above its 2013 lows in terms of both currencies. The percent margin above those bottoms peaked in late January and has since trended down with the divergence of US monetary policy from Europe and Japan, and the associated rise of the US dollar. (click on chart for larger image).

Since late-October, the margin's rapid decline relative to yen has been particularly troubling. I maintain that declining value of gold relative to a devalued currency is a red flag. Yesterday, gold price in yen terms was falling fast, closing only 5.2% above its 2013 low. If this margin descends to zero, an equivalent USD gold price suggests sub-$1,000 per ounce given current exchange rates.

Fortunately, this morning puts a pause in this decline.

2013 lows:

879.64 euros per ounce on 12/20/2013
122,443 yen per ounce on 6/28/2013

Friday AM (12/18):

979.82 euros per ounce (+11.4% margin)
129,129 yen per ounce (+5.5% margin)

Market Stats

Here's the scorecard on the stock market, S&P 500 is presently trading at 2,025.42 [UPDATE: Friday close 2,005.55]

Market corrections are generally defined as a 10% or greater move to the downside from the top of a key index. I like to use the S&P 500 (.SPX) because it includes a broader swath of America' best companies than the Dow Jones Industrial (.DJIA) - five hundred compared to thirty. Here is the score sheet of ups and downs on an intraday basis:

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

S&P 500 bear market begins below 20% at 1,707.78

Key "next level" to watch going down is 1,820.66 (low on 10/15/2014, down 14.7%)

For Fibonacci folks the "fib box" is:

50.0% retracement from 8/24 low = 2,000.87

61.8% retracement from 8/24 low = 2,032.45

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

The S&P 500 did finally escape the fib box - now we're back in. [UPDATE: Friday close 2,005.55]. Something to monitor, my bet is a rally to 2,100 by year's end.

Kitco News Gold Survey

My (full) input to the Kitco News Weekly Gold Survey:

My vote is down. Target price $1,060 per ounce.

Discussion:

Another difficult morning for commodities with Nymex oil plunging to another 7-year low ($35.72/bbl) and commodity indices falling below last week's lows. The yellow metal remains stronger relative to key commodities oil, copper and silver but is losing more value to the euro and yen when compared to August averages (relevant because of significant August market corrections on 8/24 & 8/25).

The latter is concerning because a loss of traction with devalued currencies remains a red flag - yesterday, gold denominated in yen was now only 5.2% above its 2013 low (see graph above). Even with today's corrective rebound in USD price, gold is still below the key 1,000-euro level at 979.8 euros per ounce. Gold has been trending lower with respect to both currencies since ECB Draghi's robust stimulus announcement in late-January.

This week's scorecard. Gold is in value deficit compared to the euro and yen August averages (click on chart for larger image):

Compared to mid-October, Friday (10/16):

Cheers - Colonel

Photos by Mariana Titus