"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, September 21, 2018

Gold dips to $1,196 on Soaring Stocks; Four Things to Watch

Windfall Mine (circa 1912)
Eureka, Nevada

Friday, September 21, 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)

Target Gold Price: $1,190 per ounce Target Silver Price: $14.14 per ounce.


Morning Miners!

Comex gold got hit from all sides this week.

Today our favorite metal bravely touched $1,215.8 per ounce in the wee hours and then dropped below the key $1,200-level to hit shaft bottom at $1,196.2 at the open. When I did my analysis, Comex was up 50-cents trading at $1,196.7, it has since recovered to $1,201.9 (12:14 EDT). I'm getting too old for this ride!

"Soaring stock markets" is the operative phrase. This is how Allen Sykora of Kitco News reported my thoughts this morning: 

Richard Baker, editor of the Eureka Miner Report, is also short-term bearish, listing an $1,190 target. 

“The Dow Jones Industrial Average and S&P 500 are opening to set new intraday highs,” he said. “Asian stock markets bounced overnight with the MSCI AP posting over a 1% gain. This is a very bearish headwind for gold prices as investors move away from safe havens to risky asset classes. Gold has been in a downward channel relative to the S&P 500 since the presidential election – 470 market days – a tough trend to break.” [see Chart to Watch below].

In my view, there are four things to watch going forward.

  1. The S&P 500 - Look for a top in this stock index. Currently it is in full bull mode with a perception that trade tensions with China are not as bad as feared. As mentioned above, a 470 market-day downtrend is tough to reverse. [see Chart to Watch below].
  2. Interest Rates & Inflation - The 10-year moved aggressively above 3% this week. U.S. interest rates are on the rise again putting more pressure on precious metals. The FOMC is also expected to raise the Fed funds rate next week. Fortunately for gold, 10-year inflation expectations concurrently broke to the upside from a consolidating pattern Wednesday. Presently 10-year real rates are at 0.91% - are we near a top?. Inflation keeping pace with rising rates can soften this bearish factor. [see Inflation Expectation Chart below]
  3. The Chinese Yuan - The Chinese announced this week that yuan devaluation will not be used as a tool in the trade war. Gold has demonstrated a stunning correlation with the Chinese currency since April. The yuan has stabilized near 6.85 USDCNY which should be a moderating influence for gold since the two have weakened and strengthened in lock-step. 
  4. Rising Commodities - Gold took a beating from rising commodities this week. It lost considerable value to copper which bounced nearly 7%; and oil, up 3%. Compared to the broader Bloomberg Commodity Index (BCOM), gold is down 3%. Gold fares better when it follows commodities higher. [see Weekly Summary Chart]

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) $1,196,7 per ounce, 
Comex silver (12/18 contract) $14.220 per ounce
Comex copper (12/18/ contract) $2.8290 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 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, and are have been moving more or less sideways. This week signaled a breakout, higher inflation on the way? [see Note]. 


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, recovered and then popped to 2.15% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend line, in light blue. Note that present trend now extends to the June 21, 2017 low. Interesting to note that lower-highs from April 23rd intersect higher-lows (solid blue lines). It appears we are breaking out from this triangular consolidation.

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 a much healthier $2.8290 per pound ($6,237 per tonne), now 15.1% 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. Improving perceptions on the severity of the trade issues has moved copper price away from bear territory (i.e. down 20%). 

Total copper stored in LME and Nymex warehouses is 0.350 million tonnes, notching down from last week and well below the 0.5 million tonne mark.

LME inventories are declining again after a run-up in August, let's see if a reversal is in the works: 



It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 217,600 versus Nymex 177,379 tonnes):



My Input to Kitco News 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey (also included above in the headline comments):

Target gold price $1,190 per ounce. Target silver price $14.14 per ounce.

There are many moving parts to the dramatic decline in gold prices this morning. In order of importance: domestic & global equity markets, U.S. interest rates, the Chinese yuan and commodities. The Dow Jones Industrial Average and S&P 500 are opening to set new intraday highs. Asian stock markets bounced overnight with the MSCI AP posting over a 1% gain. This is a very bearish headwind for gold prices as investors move away from safe havens to risky asset classes. Gold has been in a downward channel relative to the S&P 500 since the Presidential election, 470 market days - a tough trend to break. 

U.S. interest rates are on the rise again putting more pressure on precious metals. The FOMC is also expected to raise the Fed funds rate next week. Fortunately for gold, 10-year inflation expectations concurrently broke to the upside from a consolidating pattern Wednesday. Presently 10-year real rates are at 0.91% - are we near a top?. Inflation keeping pace with rising rates can soften this bearish factor. 

The Chinese announced this week that yuan devaluation will not be used as a tool in the trade war. Gold has demonstrated a stunning correlation with the Chinese currency since April. The yuan has stabilized near 6.85 USDCNY which should be a stabilizing influence for gold since the two have weakened and strengthened in lock-step.

Finally, gold took a beating from rising commodities this week. It lost considerable value to copper which bounced nearly 7% and oil, up 3%. Compared to the broader Bloomberg Commodity Index (BCOM), gold is down 3%. Gold fares better when it follows commodities higher. I think it likely Comex gold will find some relief at the $1,190-level next week and silver at $14.14 per ounce

[please 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. Something to watch: the yuan has been dramatically weakening since mid-April but appears to be stabilizing.

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 6.8587 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 0.30% 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 0.47% & 0.49% respectively; Comex gold 1-month volatility is 0.49%

Weekly Summary  for September 21, 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 margin above 2013 lows

Divergence resumed for gold in terms of euro compared to yen but there may be a reversal in the works:


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 132.26 as yen per euro as old euro/yen spread divergence shows a possible breakdown.

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 September 21, 2018 (0.4070). Currently this AM the AUSP is at 0.4070 making a new low and challenging the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines). 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.

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