Merry Christmas Miners! Gold Outlook for 2017

December 2011, Eureka, Nevada

Friday, December 23, 2016 AM 

Comex gold $1,135.8 per troy ounce
Comex silver $15.825 per troy ounce
Comex copper $2.4835 per pound

Merry Christmas Miners,

The good, the bad and the ugly for gold prices - hey, it ain't all that bad for 2017! My input to this morning's Weekly Kitco Gold Survey:

A strong U.S. dollar and rising interest rates have been significant headwinds for gold since post-election. However, if inflation expectations rise with nominal rates in 2017 the impact to gold price is lessened and possibly reversed if real rates turn negative. One hopeful sign for the yellow metal has been the concurrent rally in the 10-year break-even rate (i.e. spread between 10-year Treasurys and TIPS). Unfortunately the uptrend was broken Monday suggesting the inflation trade is overdone - at least for now - a bearish development for gold.

On the bullish side of the ledger, there are indications that the Russian central back believes there is value to increasing their already substantial gold position. In the last two months, Russia has purchased 2.5% of the total world production - a significant increase, some 82 tonnes. It will be instructive to see if China follows this trend. Central banks may be seeing something ahead markets are missing.

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. 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*.

An important 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 remains near a new low made Tuesday, a fall of 27% from that high.

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

For December there may be more pain ahead. However, gold at the $1,115 per ounce-level is a tempting "buy." 

My vote is down. Gold target for next week is $1,120 per ounce; Silver, $15.9 per ounce

Holiday Cheers!

*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

Gold in euro & yen terms converging post-election

Winter 2016 Edition Mining Quarterly

Elko Daily Free Press Editor Marianne Kobak McKown has put together another dandy. The Winter Edition of the Mining Quarterly has great columns on Newmont Mining Corp.'s Twin Creeks Mine, Cripple Creek and Victor Mine (Colorado), Barrick Gold Corp.'s Cortez Hills, EP Minerals' unique product and the Kinross expansion of Bald Mountain.

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 23] 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 & Mariana

Photos by Mariana Titus if not otherwise noted