Good Jobs Report; Gold Solid above $1,200: Chinese Return form Holiday

Keep on Truckin'

Eureka, Nevada (December, 2010)

Frank Abercrombie Passes

Frank was a kind and gentle man with a sensitivity for Eureka folk's yards and gardens and all the little creatures that pass there. He will be greatly missed.

FRANK ABERCROMBIE (1934-2017) (Las Vegas Review-Journal)

Update Friday February 10, 2017 AM

Morning Miners!

A wild ride for our favorite metal this week and copper is on a tear as it closes fast on the $2.75 per pound-level ($6,060/tonne).

My input to the Weekly Kitco Gold Survey:

My vote is up. Target gold price $1,240 per ounce . Target Silver price $18.0 per ounce. 

Gold's performance was mixed this week with a Wednesday high nearly breaking the $1,250 mark only to be dashed by President Trump's promise of an imminent and "phenomenal" tax package. Earlier in the week concerns about Europe's upcoming elections gave the yellow metal support. Looking ahead, Europe's political drama will no doubt re-emerge to give gold lift from today's pullback.

Soaring stock markets and a U.S. dollar bounce continue to be headwinds for the yellow metal. However, the uptick in Treasury yields may be short lived as European's seek alternatives to rising yields on sovereign debt. I expect the net effect is a resumption in gold's 7-week uptrend.

This week gold lost ground to soaring copper but gained on the falling euro and strengthening yen [see weekly summary below]. The president reaffirming the "One-China" policy and a stabilizing yuan should keep the base metal rally intact for the time being. 

Have a good weekend!

Weekly Summary updated for 2/10/17 AM (something new!)

(click on table for larger size)

McEwen Ming (MUX) $4.24 per share 

McEwen Mining & Gold Bar Thumbs Up for 2017! (Eureka Miner, 12/30/16) 

General Moly (GMO) $0.5289 per share; Moly oxide (LME) $6.92 per pound 

What's Up with General Moly (GMO)? EM Talks to CEO Bruce Hansen (Eureka Miner, 1/27/12)

Friday, February 3, 2017 AM 

Morning Miners!

A better-than-expected jobs report for January has boosted markets this morning - 222,000 versus an expected 175,000 new jobs added. The unemployment rate is little changed at 4.8%. The U.S. Labor Department Employment Situation Summary, however, showed a slowing of  hourly earnings growth compared to December - up 3 cents to $26.00 (average) compared to 6 cents in the prior month. This dampens of inflation expectations to some degree. Overall, the positive report didn't impact gold price that much with Comex presently trading at $1,218.4 per ounce. The week's high scored $1,227.5 on Thursday.

My input to the Weekly Kitco Gold Survey:

My vote is up. Target gold price $1,225 per ounce . Target Silver price $17.5 per ounce.

We see a flip-flop for gold compared to last Friday with the yellow metal maintaining solid gains across a wide set of assets - even with today's strong employment report. Gold made a 2-1/2 month high yesterday while the U.S. dollar made a 2-1/2 month low - a confirmation that in the early Trump presidency U.S. dollar strength/weakness is all-important to gold/currency trajectories.

Given a high positive gold correlation with the euro and negative compared to yen*, the trio of gold/euro/yen grow weaker or stronger as the U.S. dollar rises or falls. If we think of dollar expectations as a proxy for the uncertainty surrounding Trump initiatives and policies - a bad week for the new president becomes a good week for the trio [and vice-versa].

On a one-month basis the constancy and low volatility of euro in terms of yen (EUR/JPY) is further proof that dollar direction is currently more important than regional, national or central bank influences [graph below]. Gold price follows this trend given its high correlation with major currencies.

The euro in terms of the Japanese yen (EUR/JPY)

(click on plot for larger size)

* On a one-month basis, there is an extraordinarily high positive gold correlation with the euro and negative correlation with the yen (+0.87, -0.95 respectively) EUR/JPY exhibits unusual constancy and low volatility compared to gold or euro or yen (range bound about EUR/JPY = 122, see above graph) 

What this suggests is that gold is behaving as a currency. Additionally, gold & currencies are currently driven more by U.S. dollar expectations (and therefore President proclamations, tweets etc.) than regional, national or central bank influences. EUR/JPY ends up being roughly unchanged because it is the product of EUR/USD & USD/YEN. Taking out the dollar this way, shows that the euro & yen move together in strength/weakness.

In the new market parlance: For a "Trump-off" day the U.S. dollar weakens and the euro, yen & gold grow stronger together (given the gold correlations); vice-versa for a "Trump-on" day. We remember more normal days when euro weakness pushed investors into gold and yen strength given their safe haven status.  

Chinese Return form Holiday

Copper Nebula, Mariana Titus (2013)

Janet Mirasola, Managing director for Sucden Futures Inc. NY, described the reaction of Chinese traders to the metals complex as they return from their one week Lunar New Year holiday:

China traders returned from a week long Lunar New Year vacation without their rally caps as they came in to most assets taking risk off after Beijing unexpectedly raised short term interest rates. China equities and base commodities tumbled and the currency weakened after the PBOC [People's Bank of China] raised open market interest rates by 10 basis points. The latest increase came after the central bank raised rates on medium term loans in late January, the first time it had raised a policy rate since July 2011. Overnight the MSCI Asia Pacific Index fell 0.30% while the Nikkei closed close to unchanged. Shanghai Shares lost 0.60% by the close making some recovery from earlier losses. Euro bourses and base commodities are mixed off the early opening with the Red [copper] and Shiny [gold] Ones ignoring the support of a weaker dollar after China snubbed them this morning.(Morning pre-market brief, 2/3/17)

A key level for copper remains $5,800/tonne ($2.63 per pound). Comex copper is presently trading at $2.6380...a little too close for comfort!

The fate of the Chinese yuan remains a key tell for gold and copper - a material drop in valuation could boost gold and depress copper prices. Aggressive liquidity tightening by the People's Bank of China (PBOC) has eased, stabilizing the yuan below 7 USD/CNY. However, defending their currency has brought China foreign reserves to a 6-year low. Now that the Lunar New Year holiday is over, we'll see if this vigorous defense is sustainable. This morning, the yuan is strengthening slightly at 6.8649 USD/CNY.

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. Gold started 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 2015 and reversed to a bullish trend, peaking February 11, 2016. It bottomed again December 20, 2016 but has been trending higher since. Confirming a double-bottom in the coming months would be a significant positive for the lustrous metal.

Gold has gained 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."

(please do your own research, markets can turn on you faster than a feral cat!)

*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

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 (updated 2/3/2017) 

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, February 3] 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. 

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 [i.e. plot traces remain below green horizontal dashed line]

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted