Gold's Challenge Next Week...

Late-November, Eureka, Nevada

Friday, December 9, 2016 AM 

Comex gold $1,167.5 per troy ounce
Comex silver $17.115 per troy ounce
Comex copper $2.6520 per pound

Bird's-eye view on gold price (update Monday, December 12, 2016 AM)

It is easy to become discouraged about the direction of gold price. The yellow metal has been trending down for five months and touched a new 10-month low this morning. Prices accelerated to the downside post-election with rapidly rising interest rates but this could stall and even reverse if inflation picks up in 2017. My view is there will be some scary moments ahead, even a sub-$1,100 plunge before year's end, if the U.S. Federal Reserve decides to raise the Fed fund rate this week. Some experts say the greatly anticipated hike is already priced in but there will likely still be a dramatic market reaction - we only have to think back to last December when gold dropped to the $1,050-level with the last increase.

The question becomes whether 2017 will be a repeat of 2013 with gold losing value across a broad set of assets which included stocks, commodities and currencies or stabilize in a range above $1,100. There are some encouraging signs that the latter case will prevail (as mentioned below). I remain optimistic that gold will regain its mojo in the coming year falling in a range of $1,125 to $1,320 per ounce.

[Note: My pre-election October range for gold price was $1,240 to $1,320 per ounce, Winter 2016 Edition of the Mining Quarterly Storms Never Last: Positive News for Gold, Oil & Copper]

****

Morning Miners,

A rough week for gold as it neared 10-month lows. My input to this morning's Weekly Kitco Gold Survey:

Gold faces more challenges next week as consensus is high that the FOMC will bump interest rates against a backdrop of this week's trim-but-extend net dovish policy direction from the ECB. This likely sustains a divergence trend between the Federal Reserve and other major central banks producing tailwinds for the already strong USD and headwinds for gold price.

Gold continues a bearish descent as it faces rising interest rates that, so far, outpace inflation expectations. However, signs of increasing inflation and stronger physical demand for the yellow metal in China are encouraging. Key will be the interplay between interest rates in the U.S. and increasing inflation expectations from anticipated fiscal stimulation and improved economic growth.

A key gold ratio to watch is gold-to-S&P500 or AUSP. The ratio bottomed in early-December of last year and reversed to a bullish trend, peaking February 11. This morning the ratio is at a new 2016 low, falling nearly 25% from that high with stocks making new highs and gold in bearish retreat.

Most importantly, a trend of higher-lows broke down in late September and now the AUSP is only 3% above last December's low. We could see gold lose all its 2016 US dollar gains before year's end.

However, gold is holding ground with the embattled euro and yen [chart below]. Post-election, gold in euro and yen terms are converging and still safely above 2013 lows. Additionally, gold ratios relative to copper and oil are falling to historically less extreme levels which is a healthy sign [see Chart to Watch, below]. Missteps in the early days of a Trump presidency and/or a bump in inflation expectations could restore some glitter to gold in 2017.

My vote is down. Gold target for next week is $1,160 per ounce; Silver, $17.00 per ounce

Have a fun weekend!

Gold in euro & yen terms converging post-election

Chart to Watch

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

Gold’s record rise against key commodities
in the strong dollar era 

Excerpt from the just released Winter 2016 Edition of the Mining Quarterly Storms Never Last: Positive News for Gold, Oil & Copper:

This chart [updated through this morning, December 9] is a record of oil and copper gold ratios for the last six years. October, 2010 was a relatively peaceful period when ratios were stable and close to historical norms following the market turbulence of the 2008-2009 financial crisis.

The chart indicates the percentage value change from that moment of calm. The China slowdown began to impact commodity prices in 2011. However, prices were protected to a degree by U.S. monetary policy that suppressed the value of the U.S. dollar. 

For example, even during periods a high volatility, copper prices rarely dipped below $3 per pound. This is a level above even the most optimistic forecasts these days. Two Federal Reserve quantitative easing programs (or QE, the printing of dollars to buy bonds) helped moderate gold ratios through October 2014 amid record gold peaks, crashing copper prices and $100-plus oil. This period is shown by the gray box in the chart. The Oct. 3, 2011 +50% extreme occurred as the gold-to-copper ratio peaked following the already noted U.S. debt crisis. The bottom of the box marks a -30% low for the gold-to-oil ratio. Wild days for sure but the Federal Reserve kept commodity storms inside the hotel. 

Trouble spilled onto the streets when the U.S. stopped printing money concurrent with a global crash in oil prices in late-2014. At the same time, other central banks tried to goose their stagnant economies with increasingly looser and experimental policies as the U.S contemplated raising interest rates. This divergence in monetary policy ushered in the current strong dollar era – a real headwind for dollarized commodities.

The value of gold relative to oil and copper headed north in a hurry. This year, the gold-to-oil ratio reached a record and unsustainable high Feb. 11 (up 180%); and for copper, Sep. 7 (up 80%). To give this some historical perspective, the average gold-to-oil ratio for the QE2 through QE3 period is 15.7 barrels per ounce. From 1986 through QE3, the average is 16.0. The February peak touched a jaw-dropping 47 barrels. Copper soared from 350 pounds per ounce six years ago to top out above 640.

Gold price in U.S. dollars rallied strongly as copper and oil fell at the beginning of 2016 scoring a nearly 30% gain by early-July. The yellow metal had left the commodity hotel and dominated major currencies as I explained in the Fall Edition of the Mining Quarterly. Very unusual times indeed. 

As 2016 comes to a close there are increasing signs that major central banks will methodically pull back from aggressive policies and those nations will look to fiscal stimulation to keep their economies energized. Oil and copper prices are on the rise given an extra boost by rising inflation expectations. Gold ratios in turn are falling from their lofty peaks...It is important to note that the higher-low trendlines (dashed lines) have now been broken with declining gold ratios. So far go good - confident resource CEOs pass the gold test. Supply will slowly come into balance with demand and the yellow metal is checking back in the commodity hotel.

Cheers,

Colonel Possum

Photos by Mariana Titus if not otherwise noted