Gold moved above the key $1,250-level this week demonstrating resilience in hesitant markets. My input to the Weekly Kitco Gold Survey:
With all the market volatility caused by House Intelligence hearings and pending health care vote, the TIPs [Treasury Inflation-Protected Securities] auction yesterday provided a more steady and valuable clue on inflation expectations.
In a rising interest rate environment, lowered inflation expectations are bearish for gold price. The TIPS breakeven rate*, seen by market participants to be a gauge of these expectations, fell to a 2-month low after the auction. This rate had risen with S&P 500 after the U.S. election - both have stalled on concerns about the efficacy of the new administration policies and plans.
Regardless the outcome of today's health care vote, it is likely market attention will soon redirect to the Holy Trinity of new policies: tax reform, de-regulation and infrastructure spending. Progress on these should be bullish stocks but may revive expectations of higher inflation. A perception that delays on any or all three should provide a solid floor for gold above $1,200 per ounce.
In terms of fear factors, the French elections still cast a shadow on markets. Also, there remain concerns abroad about U.S. trade protectionism, possible currency manipulation charges and the fragility of multi-lateral trade agreements. A surprise FN victory in France or miscalculation in dealing with hot spots such as North Korea could drive the yellow metal considerably higher in the coming months.
Gold is up 1.2% for the week at $1,244.6 per ounce in early morning trading. The yellow metal gained value compared to oil, copper and the Bloomberg Commodity Index. Gold in euros was up with a small loss in terms of Japanese yen.
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 brought China foreign reserves to a 6-year low earlier this year. Premier Li Leqiang's lowering of the China GDP target to 6.5% and the Fed rate hike suggest a relaxation of this vigorous defense is ongoing. This morning, the yuan has weakned slightly but volatility is still low (1-month volatility** is 0.24%) trading at 6.9899 USD/CNY.
Have a great weekend!
*The breakeven rate is the difference in yield between inflation-protected and nominal debt of the same maturity (in this case 10-year securities). If the breakeven rate is positive it suggests traders are betting the economy may face inflation in the near future. The inflation-adjusted or real yield is also an important factor. The real yield for a 10-year TIPS at auction close was 0.466%; the breakeven rate was 1.95%. Although down for 2017, inflation expectations are viewed as stable.
** by comparison the euro & yen 1-month volatilites are roughly 0.9% & 1.2% respectively.
Red Metal Stalls
The Red One so far has had muted reaction to the ending of a strike at the world's largest Copper mine, Escondida in Chile leading many to believe that the settlement may already have been priced in. Bear in mind however that those grabbing disruptive headlines will not longer give a base of support for the algos and short term traders looking for direction.
The high for Comex copper was Monday (3/20) at $2.7100; the low was Wednesday (3/22) at $2.585. The red metal at $5,800 per tonne ($2.63) remains a key level to watch.
Gold Price Outlook 2017
Gold started the year nicely and should remain in my newly revised range of $1,180 to $1,320 per ounce*. Average gold price for 2017 is expected to print above $1,200 per ounce.
An important gold ratio to watch is gold-to-S&P500 or AUSP (see Chart to Watch below).
Gold has gained ground on the embattled euro and yen. Post-election, gold in euro and yen terms are up and safely above 2013 lows (chart below) and are both above pre-election levels. It is somewhat worrisome that gold in euro terms broke below uptrend support March 9, but it has since recovered
Gold ratios relative to copper and oil are stabilizing near historically less extreme levels which is a healthy sign. Geo-political events and/or a bump in inflation expectations could restore glitter to gold in 2017.
Gold near my low-range of $1,180 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
Here's a new chart to watch. Click on the image for a larger size:
Colonel Possum & Mariana