The Eureka Miner: February 2018

Friday, February 23, 2018

Gold $1,331 - Trouble Ahead for the Lustrous One? Lotsa Copper!

Old School Panning for Gold

Friday, February 23, 2018 AM

Morning Miners!

The Chinese Year of the Dog is underway as bleary-eyed traders return to their desks after a long Lunar Holiday. In Shanghai, no clear direction on metals yet - the red metal is in the green, gold is flat and most have crawled back in bed (it just turned Saturday there). Oh, remember that in China green is down and red is up; copper is off about 0.5%. No big shakes, it will take the next few weeks to get a good read on both metals from the Asian perspective.

For gold, the larger driver will be the dog race between inflation expectations and rising interest rates. As I note in my input to the Weekly Kitco Gold Survey, "If the former lags the latter, gold will face serious headwinds in the months ahead. Last week the yellow metal gaped higher on a hot CPI print. This week it reversed on increasing fears that the Federal Reserve will take a hawkish stance on the frequency of rate hikes. The 10-year TIPS real yield is now +0.8%; moving more positive is bearish gold."

The benchmark 10-year U.S. Treasury is above 4-year highs this week at 2.9+%. The next read on inflation will be the average hourly earnings reported next Friday by the U.S. Labor Department. Could be an exciting week for gold, I'm betting we'll see $1,320 per ounce before any upside. Please read the my input below for further details.

A lot of futures interest in copper this year with warehouses in London and the U.S. bulging with over 0.5 million tonnes of the red metal (see below).

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. My latest Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

Have a fun weekend!

Old School Mining

Windfall Mine, Eureka, Nevada

Scorecard

Here's our scorecard on where we stand for the last six months:

Intraday highs on the Comex futures exchange:

Gold $1,370.5 per ounce January 25, 2018 (February 2018 contract)

Silver $18.360 per ounce September 8, 2017 (March 2018 contract)

Copper $3.3220 per pound ($7,186 per tonne) December 28, 2017 (March 2018 contract)

Comex copper is presently trading at $3.2015 per pound, 3.6% below December's high. Improving global growth has kept the red metal above the key $3 per pound level with an added boost from passage of Tax Reform and expectations for U.S. infrastructure spending. China growth prospects appear to be firming up with a better-than-expected Q4 GDP of 6.8%. This results in a GDP 6.9% for 2017 compared to 6.7% for 2016.

Chinese returning from their Lunar holiday should provide new clues on price direction in the coming weeks.

Copper stored in LME and Nymex warehouses now exceeds 0.5 million tonnes - that's a lot of red metal, pardner!

LME inventories are building stronger as we start a new year:

It is instructive to keep our eyes on the Comex inventories which are now behind the LME (228,911 versus 337,175 tonnes):

My Input to Kitco News

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

My vote is down. Target gold price $1,320 per ounce. Target Silver price $16.4 per ounce.

After Tuesday's sharp price reversal down, gold is likely to close the week scoring losses across a broad class of assets including equities, commodities and major currencies.

On a positive note, gold has maintained low currency-like volatility, absorbing losses but not dipping to the February low ($1,309). It is likely the yellow metal will be down next week but not below the $1,320-level. Silver will follow gold lower to $16.4 per ounce.

The Chinese Year of the Dog is underway and 2018 will be a dog race between inflation expectations and rising interest rates. If the former lags the latter, gold will face serious headwinds in the months ahead. Last week the yellow metal gaped higher on a hot CPI print. This week it reversed on increasing fears that the Federal Reserve will take a hawkish stance on the frequency of rate hikes. The 10-year TIPS real yield is now +0.8%; moving more positive is bearish gold.

Gold is losing value to global commodities oil and copper. With a weekly price drop of 1.8%, gold has lost 3.5% to WTI and 0.4% to copper. The lustrous metal has slid more than 2% against the broader Bloomberg Commodity Index. Gold lost nearly 1% in terms of euro and a notable 1.6% to the Japanese yen. A sizable gain accumulated during the violent stock market correction is slowly eroding but still over 5% above its mid-December low (Comex gold-to-S&P500 ratio) [see Summary Chart & last graph below, Chart to Watch].

Additional Note:

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. The yuan stabilized below 7 USD/CNY for 2017 and has been trending steadily stronger in the new year. On a week shortened by Lunar Holidays, the yuan is stronger than last week at 6.3339 USD/CNY but above the February 7th low (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 0.42% is in the ballpark of major currency levels (but skewed given the holidays) - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

* the euro & yen 1-month volatilites are 0.54% & 1.03% respectively; Comex gold 1-month volatility is a very calm 0.86% (expect this to rise).

Weekly Summary for February 23, 2018 AM

(click on table for larger size)

Yearly Summary for 2017

(click on table for larger size)

Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!

Gold Price Outlook for 2018:

My revised gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. I believe this will secure a price floor in the $1,200 to $1,250 range with highs challenging but not exceeding $1,380 per ounce.

2018 will prove a less bullish period for gold than last year unless interest rates return to 2017 levels and copper prices fall - a less likely scenario given the recent rise of the 10-year Treasury together with U.S. growth and synchronous global growth expectations. Inflation will be another key factor to monitor, there are growing signs it is on the rise (i.e. latest CPI report).

Here's a good beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 n the middle of that range with prices just above $1,300 - a fair starting point.

Which side of this bet you take depends on whether you have a half-empty or half-full view on interest rate direction and economic prospects, both global and domestic.

Important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below). An explanation of the charts below is given in my latest Kitco column:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Click on the image for a larger size:

Gold in euro & yen terms with good margin above 2013 lows

Gold euro/yen spread contracts in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 131.35 yen per euro and trending higher.

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size:

Gold-to-S&P 500 Ratio

An important gold ratio 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 (0.4973) trended higher but then bearishly bottomed again in July, 2017 and more recently December, 12, 2017 (0.4661). Currently this AM the AUSP is 0.4893, down but close to the key 0.5-level.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

Friday, February 16, 2018

Gold $1,363 on Inflation, Weak Dollar; Kung Hei Fat Choy!

Year of the Brown Earth Dog
Chinese Lunar New Year 2018

Friday, February 16, 2018 AM

Kung Hei Fat Choy Miners!

Today is Chinese Lunar New Year. The Year of the Brown Earth Dog - better give Rover a treat. It is also an important time for metals shiny and red. Chinese traders will be away from their desks next week but when they return from partying we should get a good read on where gold and copper are headed for 2018.

Key drivers this week were a weaker U.S. dollar and hotter-than-expected number for the Consumer Price Index (CPI). On Valentine's Day the CPI was reported at a 0.5% in January and reported "well above expectations" (0.3%). The updated CPI on a yearly basis is 2.1%.

The rise in consumer prices is a gauge of inflation and often proves a double-edged sword for gold. Traditionally, the yellow metal is considered an inflation hedge. This was the behavior Wednesday when gold jumped on the news and worked up to a week high of $1,363.4 per ounce early this morning. However, higher inflation could lead the U.S. Federal Reserve to hike interest hates more aggressively - potentially a serious headwind for gold. Comex gold is presently trading a bit lower at $1,355.1 but still up a healthy 2.8% for the week.

It is important to remember that gold is fundamentally driven by "real rates" or the difference between nominal interest rates, say the 10-year Treasury yield, and inflation expectations. If this difference is near zero or negative, gold is viewed favorably by investors. As the inflation number was reported the 10-year made a day high of 2.93% - ouch! You may remember that last year, the 10-year lingered for the most part below 2.4%. We have a dog race going on here, pardner.

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

Have a fun weekend!

Scorecard

Here's our scorecard on where we stand for the last six months:

Intraday highs on the Comex futures exchange:

Gold $1,370.5 per ounce January 25, 2018 (February 2018 contract)

Silver $18.360 per ounce September 8, 2017 (March 2018 contract)

Copper $3.3220 per pound ($7,186 per tonne) December 28, 2017 (March 2018 contract)

Comex copper is presently trading at $3.2475 per pound, only 2.2% below December's high. Improving global growth has kept the red metal above the key $3 per pound level with an added boost from passage of Tax Reform and expectations for U.S. infrastructure spending. China growth prospects appear to be firming up with a better-than-expected Q4 GDP of 6.8%. This results in a GDP 6.9% for 2017 compared to 6.7% for 2016.

LME inventories are building even stronger as we start a new year:

It is instructive to keep our eyes on the Comex inventories which are now behind the LME (225,840 versus 333,625 tonnes):

My Input to Kitco News

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

My vote is down. Target gold price $1,370 per ounce. Target Silver price $17.0 per ounce.

Transitioning from a period of low price volatility, it is likely that gold will move higher next week as Chinese gold traders are away from their desks for their Lunar New Year celebration. I believe the yellow metal will test but not exceed January's $1,370.5 per ounce high (April contract).

Gold gapped higher this week on a hotter-than-expected U.S. CPI print and falling dollar, this in spite of 10-year Treasury yields peeking above the 2.9%-level. The U.S. Dollar Index,or DXY, has returned to levels at the end of the Federal Reserve's aggressive quantitative easing programs in October 2014. If the dollar rebounds and rates continue to rise, the recent gold rally could quickly fade.

In general, commodities are rising on the heels of global growth. Although gold rose an impressive 2.8% for the week it was outpaced by copper scoring a stunning 6.5% pop. The lustrous metal also lagged companion silver, oil and the broader Bloomberg Commodity Index (BCOM). Gold led major currencies euro and Japanese yen. Gold slipped in value, albeit not dramatically, to recovering domestic equities.

Relative to the embattled S&P 500, gold retreated only 1.5%. It retains a sizable gain accumulated during the violent stock market correction - over 6% above its mid-December low (Comex gold-to-S&P500 ratio). [see Summary Chart & last graph below, Chart to Watch].

Additional Note:

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. The yuan stabilized below 7 USD/CNY for 2017 and has been trending steadily stronger in the new year. The yuan is closing for holidays weaker than last week at 6.3437 USD/CNY but set a new low February 7 (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 1.21% is in the ballpark of major currency levels - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

* the euro & yen 1-month volatilites are 0.58% & 1.13% respectively; Comex gold 1-month volatility is a very calm 0.97% (expect this to rise).

Weekly Summary for February 16, 2018 AM

(click on table for larger size)

Yearly Summary for 2017

(click on table for larger size)

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!

Gold Price Outlook for 2018:

My revised gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Here's a good beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 n the middle of that range with prices just above $1,300 - a fair starting point.

Which side of this bet you take depends on whether you have a half-empty or half-full view on interest rate direction and economic prospects, both global and domestic.

Two important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below).

Click on the image for a larger size:

Gold in euro & yen terms with good margin above 2013 lows

Gold euro/yen spread contracts in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 132.28 yen per euro and trending lower.

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size:

Gold-to-S&P 500 Ratio

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

Friday, February 2, 2018

Gold $1,338 on Solid Jobs Report; Rising Rates with Inflation in the Air

Bear Claw Rock
Eureka, Nevada

Friday, February 2, 2018 AM

Morning Miners,

This morning's labor report for January showed strong gains in jobs, 200,00 versus an expectation of 177,000. Headline unemployment remained unchanged at a low 4.1%. A CNBC Business News economist characterized the report with comments "good numbers, broad-based" and "a solid jobs market." Not all bad, pardner.

Comex gold retreated a bit on the news to $1,338 per ounce but 10-year Treasury yields surged above 2.8%. The 10-year is a benchmark interest rate; rising rates are consistent with an expanding economy. The embattled U.S. dollar which has been wallowing at multi-year lows got a little mojo too. The Kitco Weekly Kitco Gold Survey reported my thoughts on gold this morning:

Richard Baker, editor of the Eureka Miner Report, also sees more weakness in the aftermath of the employment data.

“The better-than-expected jobs report this morning accelerated the 10-year Treasury above 2.8% and rebounded the U.S. dollar off three-year lows -- both bearish headwinds for gold,” Baker said. “However, a solid uptick in average hourly wages and steady advance of broader commodity indexes to multi-year levels suggest inflation is in the air -- a bullish counterbalance to rising interest rates and a potentially more hawkish U.S. Federal Reserve in 2018. For the near term, I believe the forces on gold price are net bearish, resulting in a retreat to the $1,320-level by next week.”

(my full report below)

The amazing thing about gold lately is its "low volatility" or day-to-day wiggle in price. On a one-month percentage basis, gold ups-and-downs are less than major currencies euro and yen. Copper has joined the yellow metal for zen meditation too...all quiet on the metals front? Not exactly, there is a surge in metals trading-volume in the futures market so a breakout in copper prices to the upside may be in the cards (below). Gold will be buffeted by rising interest rates and improving inflation expectations but will likely not be pushed to extremes in the near-term, either up or down.

The 10-year Treasury benchmark yield is now above 2.8%. The important link between the 10-year and gold and copper prices is explained in my latest Kitco column:

The Gundlach Indicator Restored - Gold, Copper and Interest Rates (December 27, 2017, Kitco News)

Scorecard

Here's our scorecard on where we stand for the last six months:

Intraday highs on the Comex futures exchange:

Gold $1,370.5 per ounce January 25, 2018 (February 2018 contract)

Silver $18.360 per ounce September 8, 2017 (March 2018 contract)

Copper $3.3220 per pound ($7,186 per tonne) December 28, 2017 (March 2018 contract)

Comex copper is presently trading at $3.2328 per pound, 2.7% below December's high. Improving global growth has kept the red metal above the key $3 per pound level with an added boost from passage of Tax Reform and expectations for U.S. infrastructure spending. China growth prospects appear to be firming up with a better-than-expected Q4 GDP of 6.8%. This results in a GDP 6.9% for 2017 compared to 6.7% for 2016.

Importantly, the CME reports that metals trading-volumes are soaring with 763,000 contracts compared to 525,000 for January 2017. Contracts are up 44% this January from December.

LME inventories are building strongly as we start a new year:

It is instructive to keep our eyes on the Comex inventories are now behind the LME (222,305 versus 305,575 tonnes)

My Input to Kitco News

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

My vote is down. Target gold price $1,320 per ounce. Target Silver price $16.7 per ounce.

The better-than-expected jobs report this morning accelerated the 10-year Treasury above 2.8% and rebounded the U.S. dollar off 3-year lows - both bearish headwinds for gold. However, a solid uptick in average hourly wages and steady advance of broader commodity indexes to multi-year levels suggest inflation is in the air - a bullish counterbalance to rising interest rates and a potentially more hawkish U.S. Federal Reserve in 2018.

For the near-term, I believe the forces on gold price are net bearish resulting in a retreat to the $1,320-level by next week. The trajectory of the U.S. dollar index is key to understanding future gold prices in the absence of new political or geopolitical shocks. At levels close to the conclusion of U.S. quantitative easing, the dollar may be due for a rally. Higher interest rates and stronger dollar are consistent with a stronger domestic economy.

The dual between higher nominal rates and rising inflation will likely support gold price but keep it below $1,380 per ounce.

On a weekly basis, gold has fallen 1% but posted gains relative to oil and the broader Bloomberg Commodity Index (BCOM). The yellow metal has lost ground to copper, down 1.4%, and the euro currency, down 1.3%. It is showing strength compared to the Japanese yen.

Importantly, gold gained on stalling equities which are now falling from record levels. Relative to the S&P 500, gold advanced a solid 1.7% for the week. [see Summary Chart & last graph below, Chart to Watch].

Additional Note:

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. The yuan stabilized below 7 USD/CNY for 2017 and has been trending steadily stronger in the new year. The yuan is stronger than last week at 6.2977 USD/CNY and set a new low in January (i.e. even stronger level) of 6.2676. A 1-month yuan volatility of 1.21% is in the ballpark of major currency levels - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

* the euro & yen 1-month volatilites are 1.43% & 1.18% respectively; Comex gold 1-month volatility is a very calm 0.98%.

Weekly Summary for February 2, 2018 AM

(click on table for larger size)

Yearly Summary for 2017

(click on table for larger size)

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!

Gold Price Outlook for 2018:

My revised gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

2018 will prove a less bullish period for gold than this year unless interest rates are contained near present levels and copper prices fall - a less likely scenario given U.S. growth and synchronous global growth expectations. Inflation will be another key factor to monitor, there are growing signs it is on the rise.

Here's a good beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 n the middle of that range with prices just above $1,300 - a fair starting point.

Which side of this bet you take depends on whether you have a half-empty or half-full view on interest rate direction and economic prospects, both global and domestic.

Gold in euro & yen terms with good margin above 2013 lows

Gold euro/yen spread contracts in 2018

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 137.25 yen per euro, trending higher since late-October 2017.

Chart to Watch

Here's a chart to watch for 2018. Click on the image for a larger size: