Old Timer Gold Country
McCoy Hill & Goodwin Canyon, Eureka, Nevada
McCoy Hill & Goodwin Canyon, Eureka, Nevada
Friday, August 31, 2018 AM
Chinese Yuan Reversal Is Bullish Gold (Richard Baker, Kitco News, 8/27/2018)
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
Morning Miners!
The good news is that I believe Comex gold has put in its low and it should hold for the rest of 2018. On August 16, the yellow metal plumbed $1,167 per ounce and we've been above the key $1,200-level ever since last Friday's close. This morning's trading has us at $1,207 after a brief dip to $1,204. So far go good.
The less than good news is not too expect fireworks from here. Gold has been in a losing race with domestic stocks since the Presidential election and that trend has shown few signs of changing. As the S&P 500, Nasdaq and Dow Jones Industrial Average set new records, gold slips lower and lower (please see Chart to Watch below). If you think stocks are near their tops, that relation could change to the Lustrous One's benefit.
However, I also believe currencies and not stocks have been the key drivers since April as discussed in three recent Kitco News commentaries (see links below).
Kitco News editor Allen Sykora carried my Friday thoughts on gold direction in Kitco's Weekly Gold Survey report:
Richard Baker, editor of the Eureka Miner Report, also sees more weakness in gold. He pointed out that gold and the Chinese yuan have moved in lock-step since mid-April.
“I expect it likely that gold will pull back to $1,200 per ounce next week…,” Baker said. “Embattled silver, with a gold-to-silver ratio now above 82.5, will fall into $14.50-per-ounce territory.”
(complete discussion may be found below)
Yes, silver ouch! If you believe stocks have run their course and the Chinese yuan is stabilizing, it might be a good time to buy silver - I did several weeks ago. But please, do your own research - markets can turn on you faster than a feral cat!
I am not a gold bear but for now the bull pasture looks like it needs a lot of rain.
For background on the gold/yuan connection, please read my latest Kitco News commentaries...
Chinese Yuan Reversal Is Bullish Gold (Richard Baker, Kitco News, 8/27/2018)
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
This mornings' price action:
Comex gold (12/18 contract) $1,207.9 per ounce,
Comex silver (12/18 contract) $14.605 per ounce
Comex copper (12/18/ contract) $2.6940 per pound
Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) and euro (EUR/USD) now begin to play a part too. You don't need to understand all the statistical gibberish on these charts to see the closeness of gold price to a gold model based on these currencies (note shaded 3-month area, click on plots for larger image):
"So goes the yuan goes, so goes gold."
Have a relaxing weekend - you deserve it!
Inflation Watch
Inflation expectations made a new 2018 high April 23rd above a trend lines of higher lows (dotted lines, click on chart for larger size). After a sharp dip last on May 29th, expectations recovered, then fell below trend and now appear to be on the rise again. The July CPI was up 0.2% for an annualized inflation of 2.9% (unchanged from June). European CPI dropped 0.3% for an annualized inflation of 2.1%.
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%, retreated and now is rising to 2.12% again this 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, 2017 low. New trend lines will be updated next Friday.
Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This 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.
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)
Intraday lows on the Comex exchange:
Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)
Comex copper is presently trading at $2.6940 per pound ($5,939 per tonne), now 19.2% below December's high. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there coupled with a strong U.S. dollar have sent the red metal plummeting. Copper price continues to skirt bear territory (i.e. down 20%).
Total copper stored in LME and Nymex warehouses is 0.459 million tonnes, slightly up from last week but still below the 0.5 million tonne mark.
LME inventories are leveling off after a run-up:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 267,850 versus Nymex 191,643 tonnes):
My Input to Kitco News
Target gold price $1,200 per ounce. Target silver price $14.51 per ounce.
The gold and global currency stories have shared the same drama since April: the U.S. Dollar Index (DXY) crossed above its 200-day moving average as gold and emerging market currencies headed south. To date the Turkish lira and Argentine peso have suffered most. The reasons for this bearish descent are likely a mix of U.S. monetary policy and trade tensions, both of which have strengthened the greenback.
Gold and the Chinese yuan began their descent in lock-step April 18 and that stunning correlation continues to date. Solving the gold/yuan mystery is less important than than applying the results of the relation. It appears the yuan's descent is stabilizing around the 6.80-6.85 USD/CNY level as gold moves up to sideways from its August bottom.
My updated currency model for gold, which includes the euro, Japanese yen and yuan, suggests a Comex range of $1,197 to $1,225 per ounce for a yuan approaching 6.85. I expect it likely that gold will pullback to $1,200 per ounce next week at the lower end of this range. Embattled silver, with a gold-to-silver ratio now above 82.5, will fall into $14.5 per ounce territory.
[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 impact both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been dramatically 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 now above the 6.8-level at 6.8350 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility of 0.46% is in line with major currency levels and less than gold - something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 1.00% & 0.30% respectively; Comex gold 1-month volatility is an elevated 1.03%
Weekly Summary for Aug 31, 2018 AM
Weekly Summary for Aug 31, 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 Comex 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 latest revised range given the strong correlation with falling currencies compared to a strong U.S. dollar is a $1,150 floor with highs not exceeding $1,380 per ounce.
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 [Gold bet won Thursday July 19]
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 this Kitco News column:
The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)
Note fall in gold value for all three currencies:
Click on the image for a larger size:
Gold in euro & yen terms with good margin above 2013 lows
Divergence resumes for gold in terms of euro compared to yen:
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 128.90 yen per euro as the gold euro/yen spread continues divergence.
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 (0.6849). It bottomed December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661) and again August 30, 2018 (0.4147). Currently this AM the AUSP is at 0.4166 trying to recover to the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines).
Cheers,
Colonel Possum & Mariana
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