"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Friday, June 15, 2018

Gold Swoon to $1,278 on Dollar High; McEwen Update on Gold Bar

Nevada basin grandeur
Lone Mountain, Nevada

Friday, June 15, 2018 AM



Target Gold Price: 1,300 per ounce Target Silver Price: $17.1 per ounce.

Morning Miners!

Yikes! What's happening to gold price today?

When I started doing my analysis early this morning, Comex gold had punched in a sobering low at $1,287.4 per once - only 60 cents above the May low ($1,286.8). That's bad enough but then it fell to $1,281.1 then $1,277.9 - I hope that's it for the day, it's 9:46 a.m. Let's get the weekend in gear and out of this mine shaft!

Kitco News carried a portion of my thoughts today in their Weekly Gold Survey:

“Although gold and commodities appear in common retreat now, this could change quickly as investors return to the yellow metal for [a] safe haven,” said Richard Baker, editor of the Eureka Miner Report. “I suspect the U.S. dollar high will occur today, and [the dollar will] decline next week as the euro regains some strength after its free fall following Thursday's ECB announcement. It is likely gold will return to the $1,300 level next week, with silver regaining $17 territory.”

I thank Kitco's editor Allen Sykora for correcting my grammar - I was distracted watching the golden knife fall down, down. My complete input is given below.

There was a deluge of market moving news this week: the G7 and U.S./North Korea summits, announcements from three major central banks and last night's revealing of $50B new tariffs on China. Until the European Central Bank (ECB) announcement Thursday, most of the headlines supported gold price which inched up to the $1,310-level. Then the ECB presented plans to hold interest rates steady for another year which crushed the euro currency. This in turn drove the U.S. Dollar Index to an eleven-month high (DXY 95.13) putting extreme pressure on dollarized commodities including gold. The recent copper rally is over, made worse by lackluster China economic data and revitalized fears of trade wars.

What a mess! Take heart, pardner. Wherever gold ends up today, I believe this is the bottom and anticipate a return to the $1,300-level on safe haven plays in the coming weeks (see supporting analysis below).

Have a relaxing weekend - you deserve it after today!


Latest Mining Quarterly!

McEwen Mining Update on the Gold Bar Mine

The following McEwen Mining e-mail was sent to shareholders on Wednesday, June 13:

Dear Shareowners,

Construction of the Gold Bar Mine is on track for completion in 2018, and commercial production is expected to begin in Q1 2019. Activity at Gold Bar continues to increase with deliveries of construction materials and equipment ahead of heavy mechanical and electrical installation starting later this month. Key progress since our last update:
  1. Retaining wall installation ahead of primary crusher arrival.
  2. Continued heap leach pad synthetic lining and clay liner placement.
  3. Production of heap leach pad construction materials using temporary crushing plant.
  4. Continued civil work ahead of process plant structural steel erection this month.
  5. Process equipment delivered to site.







Inflation Watch

Inflation expectations made a new 2018 high April 23rd above a  trend line of higher lows (middle dotted line, click on chart for larger size). After a sharp dip last on May 29th, expectations recovered but now appear to be leveling off.


10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2nd but were surpassed April 23rd at 2.18%. May 29th dramatically broke the trend line of higher-lows falling to 2.04%. This decline recovered to 2.12% Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21 low.

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 Glory
Eureka, Nevada

Scorecard 

Here's a scorecard on where we stand with some of our favorite metals. 

Intraday highs on the Comex futures exchange: 

Gold $1,370.5 per ounce January 25, 2018 (April 2018 contract)
Silver $18.160 per ounce September 8, 2017 (Continuous chart))
Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)

Comex copper is presently trading at $3.1695 per pound ($6,988 per tonne), retreating to 4.9% below December's high with lowered expectations for higher prices. Improving global growth has kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper is now back above $3. New trade war tensions have sent the red metal lower from recent highs (see above commentary).

Total copper stored in LME and Nymex warehouses is lower than last week at 0.523 million tonnes.

LME inventories bounced in decline: 


It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 293,450 versus Nymex 229,983 tonnes):


My Input to Kitco News 

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

Target gold price $1,300 per ounce. Target silver price $17.1 per ounce.

On a morning when gold prices are falling faster than I can write, the immediate question is how low does it go? There is strong support at $1,280 per ounce.

With the U.S. Dollar Index* at an 11-month high much of this decline is dollar related. On a weekly basis the broader Bloomberg Commodity Index has fallen as much as gold supporting this assertion. The other pressure on commodities is the escalating tension between the U.S. and China on trade and market fears of a global trade war contagion.

Although gold and commodities appear in common retreat now, this could change quickly as investors return to the yellow metal for safe haven. I suspect the U.S. dollar high will occur today and decline next week as the euro regains some strength after its free fall following Thursday's ECB announcement. 

It is likely gold will return to the $1,300-level next week with silver regaining $17 territory. 

Although the 10-year Treasury has fallen back to 2.9%, this pullback should also correct next week with rates moving back to near 3% against a backdrop of muted inflation expectations. This combination puts pressure on gold but this too could reverse if trade barriers lead to higher consumer prices. All-in-all I remain bullish on gold for 2018.

By the numbers, gold stayed even with the broader Bloomberg Commodity Index (BCOM) but gained considerably on copper (+3.3%). Although falling in dollar value, the lustrous metal outpaced the euro (+0.49%) and Japanese yen (+0.15%). It did not fare as well compared to U.S. equities, falling behind the S&P 500 (-0.51%). [see Weekly Summary Chart]

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. There has been talk from China that currency devaluation may be used as a tool in a U.S./China trade war, just talk for now. Something to watch: the yuan has been weakening since mid-April.

The yuan stabilized below 7 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is slightly weaker than last week at 6.4252USD/CNY and putting a lot of daylight above the March 26th low (i.e. stronger level) of 6.2342. A low 1-month yuan volatility of 0.28% is lower than major currency levels - something else to watch compared to 1-month volatilities of euro, yen and gold.*

* the euro & yen 1-month volatilites are 0.61% & 0.67% respectively; Comex gold 1-month volatility is currency-like at 0.50%

Weekly Summary  for June 15, 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 Revised Outlook for 2018:

My 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. My revised forecast is a floor price of  $1,285 with highs challenging but not exceeding $1,380 per ounce [6/15/2018 Comex gold tested $1,277.9 on an intraday basis, August contract - let's see what happens next week]

2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S.  Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion). 

The difference between interest rates and inflation expectations drives gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.

Here's the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in 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. Now that I've risen the floor to $1,285, it looks like the half-full folks may have something to celebrate in 2018.

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)

Note the resumed divergence of the euro-yen spread in the second chart. 

Click on the image for a larger size:


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

Note upside trend of higher lows for gold in U.S. dollars for 2018 (dotted blue line).


Gold euro/yen spread widens again 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 128.47 yen per euro as the gold euro/yen spread ticks up (above chart).

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) and June 13, 2018 slightly lower (0.4660). Currently this AM the AUSP is 0.4664 bearishly below the key 0.5-level and only marginally above the lows.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

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