Gold Strong; Fastest Wage Growth Since 2009; Watch the Chinese Yuan

Willow Creek Ranch (November, 2013)

Eureka County, Nevada

Friday, January 6, 2017 AM 

Comex gold $1,175.9 per troy ounce
Comex silver $16.510 per troy ounce
Comex copper $2.5235 per pound

Morning Miners!

Gold has giddy-up go for 2017. My input to the Weekly Kitco Gold Survey:

Gold continued its strong finish for 2016 into the first week of the new year. Peaking to a four-week high Thursday at $1,185.9 per ounce, the yellow metal has pulled back slightly on a U.S. dollar positive nonfarm payroll report [NFP, see below for further detail], trading presently at $1,175.9.

Even with a recovering dollar, early dealings show gold with solid weekly gains against the U.S.dollar, euro and yen as well as key commodities copper and oil. Gold has even increased value compared to the S&P 500 which has hovered just below all-time highs for much of the week. All very bullish indications going forward.

Since post-election, The U.S dollar and rising interest rates have been significant headwinds for the yellow metal. Fortunately, interest rates have pulled back this week together with some wage inflation suggested by the NFP [see below for further detail]. If inflation expectations rise with nominal rates in 2017, the impact to gold price is lessened and possibly reversed if real rates turn negative.

The fate of the Chinese yuan in the near term is a key tell for gold. The yuan soared against the dollar this week with very aggressive liquidity tightening by the People's Bank of China (PBOC). Arguably, this began erosion of dollar strength against other currencies. Even though this trend reversed after today's reasonably solid U.S. labor report, similar PBOC actions caused much market turmoil last January and sparked the 2016 gold rally. A key metric to watch is the overnight rate for unsecured borrowing in Hong Kong (CNH HIBOR). It spiked above 38% this week, the second highest on record [Update: CNH HIBOR is now a startling 61.3%, nearly last January's peak!].

The Year of the Rooster Approaches

We may have to wait until after the lunar New Year to see how the yuan story plays out. In the meantime, there will probably be some consolidation given gold's solid advance this week. My vote is down.

Target gold price next week is $1,160 per ounce; silver, $16.6 per ounce.

Local news

Tim Arnold, who many Eurekans remeber for his tenure with General Moly, has a new job:

Pershing Gold Hires Timothy D. Arnold as Vice President of Operations(Press release, Jan. 4,2017)

The best of luck Tim!

Overview: Pershing Gold is an emerging gold producer whose primary asset is the Relief Canyon Mine in Pershing County, Nevada. Relief Canyon includes three open-pit mines, expanding adjacent open-pit-able gold deposits, and a state-of-the-art, fully permitted and constructed heap-leach processing facility. Pershing Gold is currently permitted to resume mining at Relief Canyon under the existing Plan of Operations.

Pershing Gold's landholdings cover approximately 25,000 acres that include the Relief Canyon Mine asset and lands surrounding the mine in all directions. This land package provides Pershing Gold with the opportunity to expand the Relief Canyon Mine deposit and to explore and make new discoveries on nearby lands.

Gold Price Outlook 2017

The question becomes whether 2017 will be a repeat of 2013 with gold losing value across a broad set of assets, which includes stocks, commodities and currencies, or stabilize in a range above $1,100. There are increasing signs that the latter case will prevail. I believe gold is starting the year nicely and should remain in a range of $1,125 to $1,320 per ounce*. Average gold price for 2017 should register above $1,200 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. It bottomed again December 20 but has been trending higher since. Confirming a double-bottom in the coming months would be a significant positive for the lustrous metal.

Gold is gaining ground on 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 glitter to gold in 2017.

Gold near my low-range of $1,125 per ounce-level is a tempting "buy."

*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

Click on the image for a larger size:

Gold in euro & yen terms regaining value post-election

Fastest Wage Growth Since 2009

The Labor Department's nonfarm employment report released this morning, showed an increase of 156,00 jobs for December versus 185,000 expected. The unemployment rate ticked up slightly to 4.7% from the prior month's 4.6%. Nonetheless it was a solid report indicating, in the words of one CNBC Business News commentators, "a reasonably good economy." Chief U.S. Economist for Deutsche Bank Securities went so far as to say the report was "boring."

The good news for gold is that 2016 witnessed a 2.9% increase in the average hourly wage - the strongest gain since 2009. The December number was $26 per hour up an encouraging 0.4% from the prior month. This suggests inflationary pressures may be building - a bullish indication for the yellow metal. Stay tuned.

McEwen Mining & Gold Bar Thumbs Up for 2017!

An exciting development for Eureka will be the re-opening of the Gold Bar Mine north of town. Some us old timers have fond memories of Gold Bar when it was operated by Atlas in the late-1980s and early-1990s (Johnny Horton and Atlas Mine Memories, Eureka Miner, Nov. 11, 2009).

McEwen Mining expects to have permitting done and an ROD by the third quarter of 2017. Mine construction will follow with first production expected by the end-of-2018. Their mine feasibility study assumes a reasonable $1,150 per ounce which nets a greater than 20% internal rate-of-return and payback in 3 years.

Here is a recent Kitco video with McEwen Mining CEO Rob McEwen discussing Gold Bar, other projects and his gold outlook for 2017:

McEwen Gives His Gold Outlook In This No-holds-barred Interview With Daniela Cambone (Kitco News, 12/28/2016)

Rob McEwen has been inducted in the the Mining Hall of Fame receiving the honors January 12. Congratulations and the best of luck to you and your team in 2017!

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, January 6] 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.

Have a good weekend!

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted