Gold Rebound? "Solid Jobs Report" Loretta Mester Speaks

In a World Where the ALPI_E LODGE Looks Square and Nothing Else Does

Eureka, Nevada (September 2012)

Update: Friday, October 28, 2016 AM 

The Colonel will be on the road for a month. Here's the latest before I depart:

Comex gold $1,273.5 per troy ounce

Comex silver $17.765 per troy ounce

Comex copper $2.1855 per pound

A mild uptrend for gold continues. My input to this morning's Weekly Kitco Gold Survey:

USD gold price is slightly up for the week. Three key drivers: global bond selloff with U.S. 10-yr note touching 1.88%, continuing Japanese yen weakness trend and ongoing commodity normalization.

Interest rates are on the rise with an expected U.S. Federal Reserve hike expected for December. This was allied this morning with a better-than-expected GDP of 2.9%. However, inflation expectations are also increasing blunting to some extent the rise in rates and negative effect on gold price. Money moving away from Treasurys as a safe haven option is also supportive for gold.

The yen continued to weaken from the key-100 USDJPY level; a bullish indication for gold. Moving above 105 USDJPY this morning affirms the uptrend which is encouraging because both often compete for safe haven status (by contrast, gold in yen terms came perilously close to it 2013 low earlier this month)

The Bloomberg Commodity Index (BCOMTR:IND) continues to trend higher from its January low (up more than 17% to date). In turn, key gold ratios are reverting to mean trend lines from recent unsustainable levels. For example, in early-September an ounce of gold fetched a record 644 pounds of the red metal; this morning, a more reasonable 580. From a commodity viewpoint gold prices are stabilizing [see graph below].

I therefore remain cautiously bullish near term with uncertainties surrounding the U.S. election still in play.  

Have a good weekend!

My vote is up. Target price for gold next week is $1,280; target for silver, $17.9

This six-year chart illustrates the record rise in gold value relative to oil and copper to unsustainable levels. The rising trend started in October 2014 at the end of U.S. quantitative easing (the printing of dollars to buy bonds) and the concurrent collapse of the global oil market. There are now signs of market rebalancing as oil and copper prices rebound and gold price stabilizes:

(Click on image for larger size)

This will be the subject of my column for the upcoming 2016 Winter Edition of the Mining Quarterly.

Update: Friday, October 14, 2016 AM 

Comex gold $1,253.0 per troy ounce

Comex silver $17.445 per troy ounce

Comex copper $2.1185 per pound

At least three good things happened for gold this week! My input to this morning's Weekly Kitco Gold Survey:

Although USD gold price is near last Friday's close, three positives occurred this week: very solid foreign participation in the Thursday U.S. 30-year Treasury auction, ongoing commodity normalization and a Japanese yen weakness trend.

Healthy foreign demand for longer maturity Treasurys signals the cost of currency hedges is not great enough to offset the yield advantage of U.S. bonds in a negative interest rate world. A flatter U.S. yield curve should blunt somewhat the deleterious effect of future Fed rate hikes, especially if inflation expectations are on the rise (i.e. real rates remain low which is gold bullish).

The Bloomberg Commodity Index (BCOMTR:IND) has been on the rise since September (up more than 5% to date). In turn, key gold ratios are reverting to mean trend lines from recent unsustainable levels. For example, in early-September an ounce of gold fetched a record 644 pounds of the red metal; this morning, a more reasonable 590. From a commodity viewpoint gold prices are stabilizing.

Lastly, a yen weakening from the key-100 USDJPY level is good for gold. Gold's rise this week against the yen is encouraging because both often compete for safe haven status (by contrast, gold in yen terms came perilously close to it 2013 low earlier this month).  I therefore remain cautiously bullish near term given uncertainties surrounding the U.S. election still in play and questionable soundness of the European banking system.

My vote is down. Target price for gold next week is $1,260; target for silver, $17.6

For Dodger fans the Saturday game with the Cubs in Chicago should be a thriller. Go Dodgers!

The Colonel and daughter Lisa at Dodger Stadium

(Sept. 24, 2016)

Friday, October 7, 2016 AM 

Comex gold $1,263.3 per troy ounce
Comex silver $17.590 per troy ounce
Comex copper $2.1750 per pound

What a week it was for gold! My input to this morning's Weekly Kitco Gold Survey:

A week that features a 5% drop in gold prices and an even greater drop in a major reserve currency is certainly one to remember. A mildly worse-than-expected U.S. jobs report, an ECB hinting a QE taper and a historic hurricane in Florida mixes up a witches' brew for predicting the next move in gold prices.

Although the precipitous drop in the British pound may have been initiated by robot trading and the gold selloff by a large liquidation [see below], downward momentum for both is now in play. I continue to believe the actions of major central banks outside the U.S. have established a floor under gold price with negative interest rates and increasingly experimental monetary policies. This week challenged that floor but prices should recover some even with a more likely December hike in U.S. interest rates.

It is important to remember that the Chinese have been off all week on holiday and have not voted in gold's fortunes. Upcoming holidays and celebrations in both China and India should boost physical demand. I therefore remain cautiously bullish near term with uncertainties surrounding the U.S. election still in play and questionable soundness of the European banking system.

I think the yen is very important to watch posing one of the greatest challenges to the yellow metal this week. Gold in yen terms is fast approaching its 2013 low (within 6% this AM), a very bearish indication for gold prices [see chart below]. There is probably a little more short term pain ahead next week.

My vote is down. Target price for gold next week is $1,240; target for silver, $17.2

Have a fun weekend!

(see more commentary at the bottom of this report...)

Chart to Watch

Here's a chart we've watched before. It is the price margin of gold (%) from its 2013 lows in terms euro and Japanese yen (euros per troy ounce, yen per troy ounce). Click on the image for a larger size:

These plots are important because the ECB and Japan have taken extreme measures to devalue their currencies. If the price of gold rises against devalued currencies that is a bullish indicator; if it falls, a bearish one. Falling all the way to the 2013 lows or below would be very bearish.

2016 has been very good for gold against all major currencies rising with more than a 40% gain from its 2013 low for the euro. The gains for gold have been less in terms of yen (16%) because the gold often competes with the yen for safe haven status. After Brexit and recent attempts by the Bank of Japan to curb deflation and revive its moribund economy, gold has fallen from its 2016 highs. That loss accelerated this week bringing gold in yen within 6% of its 2013 low this morning. Something to watch.

Here are the recent stats on 2016 gold lows in U.S. dollars:

$1,251.8 per troy ounce, yesterday 10/6/2016

$1,259.1 per troy ounce 6/24/2016

$1,207.0 per troy ounce 5/31/2016

Hopefully, the markets won't need to test the May low. Currently it is very near the commodity value of gold, or $1,201.4, based on current oil, copper and silver prices. Stay tuned.

Fall Edition 2016 - Mining Quarterly

The Fall Edition 2016 of Mining Quarterly has hit the streets.

Marianne Kobak McKown has done another outstanding job creating a  terrific MQ which features a column by our old friend Adella Harding! There is an excellent update on Newmont's Long Canyon Project, Barrick's Turquoise Ridge and much, much more.

My MQ  column on gold's bullish path forward was also carried in the Elko Daily Free Press:

Gold, currencies and negative interest rates; The stars and planets of global monetary systems align for gold (September 8, 2016)

(Checkout the online Mining Quarterly today!)

Happy reading!

Numbers used for analysis (October 7 early AM prices):

Bloomberg Commodity Index (BCOMTR:IND)

173.56 (low January 20, 2016 146.8798)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $ 50.33 per barrel 

Brent crude $ 52.35 per barrel 

Comex copper $2.1750 per pound

Comex gold $1,263.3 per troy ounce 

Comex silver $17.590 per troy ounce

Latest Nevada gasoline prices

Gold Rebound? "Solid Jobs Report" Loretta Mester Speaks

The Colonel is cautiously bullish on the yellow metal

Morning Miners!

Searching through some old Eureka Miner photos, I found today's picture of the Alpine Lodge (with the missing "N") from September 2012. The caption is a good one for understanding the market this week. Brown Brothers has since done a great job stabilizing this historic building and eliminating a lot of its less-square features.

I've watched about 90 monthly jobs reports on CNBC Business News and reported on most since the darkest days of 2009. It is deemed among the most significant data for markets since employment is a key indicator of the health of our economy. Also, because "full employment" and price stability (i.e. some but not a lot of inflation) are key goals of the Federal Reserve's dual-mandate, these data greatly influence the pace and magnitude of future interest rate hikes. Rising interest rates in a low inflation environment are a significant headwind for gold...so set the alarm at 5:00 a.m. and await the news every first Friday of the month!

An important voice for the Fed's direction has been coming lately from Lorreta Mester - President and Chief Executive Officer, Federal Reserve Bank of Cleveland. Her comments about the wisdom and timing of future hikes contributed in part to gold's down swoon this week. She said,"We have to be a little preemptive in making sure that we're moving the interest rate up so that we can keep the expansion sustained."

Here is the Bloomberg report on those comments

Don't delay U.S. rate hike, says Fed's Mester: Bloomberg (Bloomberg News, October 3, 2016)

Now back to the wee hours of this morning. Who was sitting with the CNBC talking heads when the September employment numbers rolled in? Loretta Mester!

A quick Labor Department report snapshot: 156,000 jobs added versus an expectation of 167,000, headline unemployment creeping up to 5%, a 0.2% rise in average hourly earnings and net downward division of 7,000 jobs for two prior months.

What you may think of these numbers doesn't move the price of gold. What Ms. Mester thinks does. Although Fed Chair Janet Yellen has the final say, Ms. Mester is a key input to the FOMC when they reconvene for future discussions.

She said 156,000 jobs is a "solid number" reminding the CNBC crew that the 3-month average is 192,000 or north of 2 million jobs annually. From her viewpoint 5% unemployment is "full employment" (this an economist way of saying the natural rate of unemployment is nearing optimum. "Full employment" does not mean that everyone has a job). The average hourly earnings uptick implied some inflation was returning and the "economy remains very resilient." Of course, Ms. Mester demured from saying when but did affirm the next bump would be the much anticipated 0.25%.The CNBC panelists concluded that December was now the most likely time (just like last December).

As I have said for some time, a hike in short-term interest rates is not the death knell for gold especially if inflation rises in tandem. Gold price reacts to nominal interest rates less inflation expectations. However, market reaction to the next bump up will probably put some pressure on the price of the yellow metal. From my Kitco input above, remember that the actions of major central banks outside the U.S. have established a floor under gold price with negative interest rates and increasingly experimental monetary policies - they are easing, we are tightening.

I remain cautiously bullish going forward.

What Triggered the Selloff?

Although comments from Loretta Mester and suggestions that the ECB may taper their QE program set the stage for the pullback in gold, there is usually a trigger for a dip in prices this severe. Dennis Gartman of the renowned Gartman Letter offered this explanation:

As for gold and the other precious metals they remain rather obviously weak and as we move away from Tuesday’s collapse it appears more and more that this was a forced liquidation on the part of a large… actually a massive… hedge fund out of London. The sheer panic that swept through the gold market then really hadn’t the look of a sell off predicated upon a rumoured push by the ECB to curtail its purchases of sovereign debt securities, nor had it the look of a rush on the part of hedgers in the gold mining industry to hedge forward production. Rather it had the look of forced margin-clerk liquidation. It looked like panic on the part of someone, somewhere who had lost control of the situation. (Dennis Gartman)

Have a good weekend!

Cheers,

Colonel Possum

Photos by Mariana Titus if not otherwise noted