"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), McEwen Ming (MUX) 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.

Sunday, January 10, 2016

Gold's Amazing Week, $1,113; Jobs Report Spares Armageddon; Watch the Yuan


Eureka Quartzite, Lone Mountain
Eureka, Nevada

Latest Updates

Friday morning, Jan 15, 2016

The Eureka Miner will publish a summary of market events later next week...but in the meantime...

The global sell-off continues with equities plunging globally. The DOW has shed 400 points and the S&P500 is down 2.4% at 1,875.89
Comex Copper scores a new low of $1.9385 per pound (3/16 contract) 
WTI dropped to $29.28/bbl , presently trading at $29.65/bbl

Here are my thoughts on gold sent to the Kitco Weekly Gold Survey moments ago (8:11 a.m. PST):

Thank heavens gold is still running with the currency pack and not commodities! If the latter were true, this week's washout in oil and copper would certainly have pushed the yellow metal below $1,000 per ounce. That said, the currency picture is a mixed bag by week's end with gold gaining strength on the euro but trending towards its 2013 low in yen terms. These comparisons are important because weakness relative to a devalued currency remains a red flag (chart attached - in morning trading, gold is only 4.4% above its 2013 low in yen terms;a much more comfortable 13.3% in euro).

(Click for larger view)

It is encouraging that gold has regained safe-haven status again as global equities plummet but it faces fierce competition from The Japanese yen and U.S. Treasurys with the 10-year dipping briefly below 2%. I believe it likely that some of the early pop seen this Friday will fade in the coming shortened market week. My vote is down. Target price $1,080 per ounce.



The Lone Wolf did not win the PowerBall lottery, however... 

Last Friday's target price for this week was $1,090; Comex gold is presently trading at $1,089.9 (10:55 a.m. EST)

It ain't over til' it's over!

Wednesday evening, Jan 13, 2016


The S&P 500 continues its 2016 decline falling down another 2.5% closing at 1.890.28...down 7.5% only 13 days into the New Year!
Benchmark miner Freeport-McMoRan (FCX) closed at $3.74, now over 73% below early-October's share price.
Comex Copper just punched in another new low of $1.942 per pound (3/16 contract) in after hours trading
Oil closed at $30.48/bbl (WTI 2/16 contract). WTI dropped to $29.92/bbl 1/12 before recovering above $30/bbl
Comex gold has stabilized at $1,087.1 per ounce (2/16 contract)
It ain't over til' it's over!

Tuesday morning, Jan 12, 2016
The Stoxx 600 Miner's Index is at its lowest point since October 2003
This report's Eureka Miner's Index (EMI, see sidebar) is presently 0.11, a new low. For comparison the EMI scored a high of 816.78 on January, 4, 2011.
Benchmark miner Freeport-McMoRan (FCX) is currently trading at $3.88, over 70% below early-October's share price.
Comex Copper just punched in a new low of $1.9525 per pound (3/16 contract)
Oil is getting closer to $20 territory scaring up $30.10 per barrel this morning (WTI 2/16 contract), we could test $28 oil in the short term...[Update, WTI dropped to $29.93/bbl before recovering above $30/bbl]
Comex gold is losing some giddy-up at $1,087.6 per ounce (2/16 contract)
Not pretty out there in commodity land!

Monday morning, Jan 11, 2016
Comex Copper dropped below the key $2-level to plumb $1.9665 per pound, presently trading at $1.9785; Comex gold is back above $1,100, presently $1,101.8 per ounce. The Chinese onshore currency (CNY) has stabilized some with PBOC buying the offshore renminbi (CNH), The Shanghai is down another 5.3% at the Monday close. The U.S. stock markets opened sheepishly higher - what a mess for the New Year!

Latest News


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


Mining Quarterly


The online version:


"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:




***
Please checkout Mariana's Eureka, Nevada on Facebook

Numbers used for analysis (01/08/2016 Friday close):

Goldman Sachs Commodity Index

S&P GSCI 295.00, 01/16 contract (intraday low 292.95, on 01/07/2016)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $33.16 per barrel (intraday low $32.10 on 01/07/2016)
Brent crude $ 33.93 per barrel (intraday low $32.55 on 01/07/2016)
Comex copper $2.0220 per pound (intraday low $1.990 on 01/07/2016)
Comex gold $1,097.9 per ounce (intaday high $1,113.1 on 01/08/2016)
Comex silver $13.918 per ounce (intraday low $13.620 on 12/14/2015)

Canary in the gold mine: Fate of high yield corporate bonds

iShares iBoxx $ High Yield Corporate Bond (HYG) $79.52 ($78.21 52-week low)

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



Cliffs of Devonian Dolomite & Limestone
Devil's Gate, Eureka, Nevada

Gold's Amazing Week, $1,113

Macro drivers: Continued concerns about China; U.S. Federal Reserve interest rate trajectory 

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

Gold bet for next week: $1,090 territory

Happy New (Market) Year Miners!

What a way to begin 2016! Monday started with a global sell-off on China fears followed by steep declines in U.S. stock markets not seen for a "new year start" since 1932...no wait, it got worse Thursday...not seen ever, EVER!

Whoa! It's not all that bad, pardner. I'm writing this Saturday morning and Friday closed as "the worst first week" of the year since 2011...that's a little better than ever, EVER. Nonetheless, the S&P 500 stumbled into 2016 by losing 6% of its value in one week, the DOW experienced similar loss (see "Market Stats" below). The good news? Gold is up more than 3.5% peaking to $1,113.10 per ounce Friday; the closing price scored $1,097.9.

Gold's commodity buddies didn't fare nearly as well. Oil dropped to new lows visiting $32 per barrel territory; copper dipped briefly below $2. The Goldman Sach's Commodity Index (GSCI) punched in a new low Thursday. At least you can now enjoy $2.09 per gallon gas at Carson City Costco.

What was behind all the New Year carnage? Was it the North Korean (maybe-we've-got-an) H-bomb test? Was it China's micro-managed Shanghai stock exchange falling like a knife? No, these were marginal influences. Think back to August - a similar market reaction across asset classes and a bump up for gold. Same root cause: depreciation of the Chinese yuan (or renminbi CNY ¥) against the U.S. dollar.

On Monday, a U.S. dollar bought 6.4837¥; by Friday, 6.5829¥....a move of 1.5%. In currency land that's a decent move but not a run for the exits. Stepping back at bit, the USD fetched 6.1197¥  on August 10 when the PBOC began its recent managed devaluation - a move-to-date of 7.6%. A Reuter's article predicted Thursday that there could be another 10-15% on the horizon...that would be a big move.


There are two parts to the yuan story: 1) Investors worrying that further depreciation signals worse-than-expected economic conditions in the world's second largest economy, and 2) the recent inclusion of the yuan into the coveted IMF club of major reserve currencies (U.S. dollar, euro, Japanese yen, Bristh pound and now the Chinese yuan)

IMF Managing Director Christine Lagarde said the decision [to include the yuan] represented "an important milestone" in China's integration into the global financial system. "It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," she said in a statement. (CNN Market Report, 12/01/2015)

Last week's market reaction is clearly due to a fear that the yuan has stumbled into free fall. A more moderate view (which I support) is that the Chinese currency is slowly moving to a market-based valuation (as desired by the IMF) from its U.S. dollar peg. A bumpy road but hopefully not a tailspin transition.

Friday morning, a positive monthly U.S. nonfarm payroll report of 292,000 jobs added in December and stable 5% unemployment rate helped blunt market Armageddon. The world's largest global economy is still humming along. How did all of this affect gold price this week? Here's what I told the Kitco Weekly Gold Survey (Kitco calls the ole Colonel the "Lone Wolf" for my often contrarian inputs, reference last sentence):

Gold had a great week indeed. I think we'll see some pullback next week given this morning's better-than-expected NFP which blunts recent global Armageddon scenarios. The key currency to watch is the Chinese yuan. 

My vote is down. Target price $1,090 per ounce. 

Discussion: Gold achievements this week are a bullish reversal in terms of both the euro and the yen ["Chart to Watch" below] and a spike in value relative to key commodities oil and copper. An ounce of gold now buys an amazing 33 barrels of oil and 540 pounds of copper. The former is a new record; the latter, at levels not seen since the financial crisis. As a point of comparison, the yuan devaluation last August triggered similar spikes - 30 bbl/oz and 517 lb/oz (the 3-month averages for both are now 28.4 and 516). 

There seem to be at least two camps for explaining the ongoing yuan devaluation. The more extreme is that the yuan will depreciate a further 10-15% relative to the USD (Reuter's story yesterday). A more moderate view is that the PBOC is transitioning the yuan, in a hopefully stable manner, from a USD peg to valuation against a basket of currencies. With a stronger dollar, most of those currencies are falling - so falls the yuan. If the latter proves true, then the yuan devaluation should have the similar effects on gold as the currencies in the basket. For example, gold has reversed its downtrend relative to the euro so gold in euro terms is receiving a nice bounce in price. 

Of course, as gold price in yuan rises consumer demand in China may fall. All-in-all, the yuan devaluation is likely only another 3-5% and its affects on gold price contained. The extreme case may cause a rush to the exits for many asset classes and gold benefits only if it maintains its new found safe haven status (wherein the bump-up in USD gold price could be potentially substantial).




The last 2015 Lone Wolf gold target came within 20 cents of the 2015 closing price for Comex gold (2/16 contract): $1,060 versus $1,060.2 per ounce. 



Chart to Watch

Gold price margins from 2013 lows (euro, yen)

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

The yellow metal has stayed 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. Fortunately, last week witnessed a reversal in this downtrend for both euro and yen.

2013 lows:

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

Friday close (01/08/2016):

1005.31 euros per ounce (+14.3% margin)
128,718 yen per ounce (+5.1% margin)

Market Stats

Here's the scorecard on the stock market, S&P 500 is at 1,922,03 (Friday close):

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.

Last week, the S&P 500 has fallen straight though the old fib box - a very bearish indication.

Kitco News Gold Survey

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

Gold had a great week indeed. I think we'll see some pullback next week given this morning's better-than-expected NFP which blunts recent global Armageddon scenarios. The key currency to watch is the Chinese yuan. 

My vote is down. Target price $1,090 per ounce. 

Discussion: Gold achievements this week are a bullish reversal in terms of both the euro and the yen (attached chart) and a spike in value relative to key commodities oil and copper. An ounce of gold now buys an amazing 33 barrels of oil and 540 pounds of copper. The former is a new record; the latter, at levels not seen since the financial crisis. As a point of comparison the yuan devaluation last August triggered similar spikes - 30 bbl/oz and 517 lb/oz (the 3-month averages for both are now 28.4 and 516). 

There seem to be at least two camps for explaining the ongoing yuan devaluation. The more extreme is that the yuan will depreciate a further 10-15% relative to the USD (Reuter's story yesterday). A more moderate view is that the PBOC is transitioning the yuan, in a hopefully stable manner, from a USD peg to valuation against a basket of currencies. With a stronger dollar, most of those currencies are falling - so falls the yuan. If the latter proves true, then the yuan devaluation should have the similar effects on gold as the currencies in the basket. For example, gold has reversed its downtrend relative to the euro so gold in euro terms is receiving a nice bounce in price. 

Of course, as gold price in yuan rises consumer demand in China may fall. All-in-all, the yuan devaluation is likely only another 3-5% and its affects on gold price contained. The extreme case may cause a rush to the exits for many asset classes and gold benefits only if it maintains its new found safe haven status (wherein the bump-up in USD gold price could be potentially substantial). 

The last 2015 Lone Wolf gold target came within 20 cents of the 2015 closing price for Comex gold (2/16 contract): $1,060 versus $1,060.2 per ounce

This week's scorecard. Note gold's large jump in commodity value (click on chart for larger image):


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


Cheers - Colonel

Photos by Mariana Titus

1 comment: