Eureka, Nevada
Friday, October 26, 2018 AM
Target Gold Price: $1,250 per ounce Target Silver Price: $14.85 per ounce.
Morning Miners!
It has been a Clint Eastwood week. Let's start with the music:
If you are a gold miner it's been a good week with your lustrous product testing the $1,240-level three times (Comex Tuesday $1,243.0, Thursday $1,242.0 and today $1,241.2). Comex gold is currently trading a tad below at $1,237.6 per ounce. There is more upside ahead.
Gold in safe-haven mode has made substantial gains compared to the stock market, key commodities and major currencies. That's a World Series grand slam (see Weekly Summary Chart below).
Put these two thoughts together:
- Noted economist Mohamed El-Erian said this week, "Global divergence creates volatility."
- Volatility is driving gold price.
That's a bullish scenario, pardner. This is how I explained this to Kitco News this morning:
Volatility and equity declines are now driving gold price. This is a typical safe-haven situation; what is unusual is the current closeness of the relation and the yellow metal's dramatic breakaway from the currency pack in October.
From April to late-September, the Chinese yuan drove gold price with a lesser but supporting contribution from the euro and yen. Now stock market volatility is the key factor in gold's welcome rally. Gold continues this week with gains not only in U.S. dollar value but substantial advances compared to domestic equities, key commodities and currencies.
A one-month gold regression model based solely on the CBOE Volatility Index (VIX) and S&P 500 has a statistical error of only $7.81 per ounce (less than 1% error) [see chart at the end of this discussion].
Based on this model an upper bound for Comex price is currently $1,256.4 per ounce with a lower bound at $1,225.2. I believe it likely that gold will find the $1,250-level next week with silver following to $14.85 per ounce.
The rise of real rates in the U.S. remain a headwind for gold. Real rates retreated 5 basis points from last week on moderating inflation expectations but are still slightly above 1% on a 10-year basis.* If inflation can keep pace with the rise in nominal Treasury yields, gold should fare well going forward given uncertainties surrounding a slowing global economy, wobbly geo-politics and growing trade tensions.
From April to late-September, the Chinese yuan drove gold price with a lesser but supporting contribution from the euro and yen. Now stock market volatility is the key factor in gold's welcome rally. Gold continues this week with gains not only in U.S. dollar value but substantial advances compared to domestic equities, key commodities and currencies.
A one-month gold regression model based solely on the CBOE Volatility Index (VIX) and S&P 500 has a statistical error of only $7.81 per ounce (less than 1% error) [see chart at the end of this discussion].
Based on this model an upper bound for Comex price is currently $1,256.4 per ounce with a lower bound at $1,225.2. I believe it likely that gold will find the $1,250-level next week with silver following to $14.85 per ounce.
The rise of real rates in the U.S. remain a headwind for gold. Real rates retreated 5 basis points from last week on moderating inflation expectations but are still slightly above 1% on a 10-year basis.* If inflation can keep pace with the rise in nominal Treasury yields, gold should fare well going forward given uncertainties surrounding a slowing global economy, wobbly geo-politics and growing trade tensions.
* real 10-year rate is now 1.03% (last week 1.08%)
One more bit of good news is this morning's GDP data for the third quarter. GDP scored an annualized 3.5% compared to an expectation of 3.4 % indicating there is still a strong economy beneath all the fuss n' muss. Of course in the inverted logic of recent markets, strong growth implies more Federal Reserve interest rate hikes so the S&P 500 has another reason to be down today - good news is sometimes interpreted to be bad.
Additional bad news IS the divergence of global markets on many levels due to differing central bank policies, U.S./China trade tensions, U.S/Saudi tensions, wobbly Italian Banks and a dicey Brexit resolution. A real witches brew.
For sometime, U.S. stock markets escaped much of the global turbulence and reached all time highs in September.
Not anymore.
As commentator Sarah Eisen said this morning on CNBC Business News, "It's getting ugly out there!"
This morning the benchmark S&P 500 stock index plunged to 2,618.16, over 10% down from its September 21 high of 2,940.91 - ouch! [Update: closing at 2,658.69 down 1.73% for the day & down 9.6% from the intraday high in September].
Prices have recovered some, let's see where we close. The good, the bad and the ugly...
...or Christmas rally? Keep the faith!
This mornings' price action:
Comex gold (12/18 contract) $1,237.6 per ounce,
Comex silver (12/18 contract) $14.705 per ounce
Comex copper (12/18/ contract) $2.7200 per pound
Here is a chart that shows how volatility is driving gold price within upper & lower bounds:
Gold Model based on the S&P 500 and CBOE Volatilty Index (VIX)
Have a relaxing weekend - you deserve it!
Gold/Currency relation kaput
As I noted last week, the gold/currency relation is kaput.
A picture tells the story. Here is my three-currency model (yuan, yen & euro) that had (until recently) very accurately tracked gold price (click on chart for larger image):
Gold model based on the Chinese yuan, Japanese yen and euro currencies
Last week the error between actual and modeled value was nearly 6-standard deviations (6-sigma). As I said, that's akin to aiming at a 100-yard target at the Windfall rifle range and hitting the top of the mountain!
Gold no longer travels with the currency pack and has returned to safe haven status in a troubled world.
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 moved more or less sideways. This week witnesses a dramatic fall below trend. Inflation rate is slowing.
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% several weeks ago. This Wednesday expectations are a much lower 2.07%. The current trend line of higher-lows is shown in dark blue; older trend line, in light blue. Note that trend now extends to the June 21, 2017 low. This week's data plunged below trend, time for a trend update next week.
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 down from last week at $2.7200 per pound ($5,997 per tonne), now 18.4% 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 is very close to entering bear territory for a second time this year (i.e. down 20%). Latest China GDP numbers confirm economic slowing in the third quarter 6.5% (versus 6.6% expected) compared to 6.7% in the second quarter.
Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper this week:
- Freeport is a victim of the U.S.-China trade tensions which are prompting them and other mining companies to defer investments in new projects, and “that will add to this impending supply gap situation for the industry.”
- He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”
LME inventories continue declining after a run-up in August:
It is instructive to keep our eyes on the Nymex inventories which are no longer behind the LME but also falling (LME 152,225 versus Nymex 160,483 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 $1,250 per ounce. Target silver price $14.85 per ounce.
Volatility and equity declines are now driving gold price.
This is a typical safe-haven situation, what is unusual is the current closeness of the relation and the yellow metal's dramatic breakaway from the currency pack in October. From April to late-September, the Chinese yuan drove gold price with a lesser but supporting contribution from the euro and yen. Now stock market volatility is the key factor in gold's welcome rally.
Gold continues this week with gains not only in U.S. dollar value but substantial advances compared to domestic equities, key commodities and currencies.
A one-month gold regression model based solely on the CBOE Volatility Index (VIX) and S&P 500 has a statistical error of only $7.81 per ounce (less than 1% error). Based on this model an upper bound for Comex price is currently $1,256.4 per ounce with a lower bound at $1,225.2. I believe it likely that gold will find the $1,250-level next week with silver following to $14.85 per ounce.
The rise of real rates in the U.S. remain a headwind for gold. Real rates retreated 5 basis points from last week on moderating inflation expectations but are still slightly above 1% on a 10-year basis.* If inflation can keep pace with the rise in nominal Treasury yields, gold should fare well going forward given uncertainties surrounding a slowing global economy, wobbly geo-politics and growing trade tensions.
* real 10-year rate is now 1.03% (last week 1.08%)
[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 copper negatively, gold is now moving in opposition to the yuan. Something to watch: the yuan dramatically weakened from mid-April, stabilized and now appears on the move again to 7 USD/CNY.
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 closing in on the 7.0-level at 6.9450 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 is 0.44%. Something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 0.62% & 0.61% respectively; Comex gold 1-month volatility is an elevated 1.41%
Weekly Summary for October 26, 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)
Gold value for all three currencies is catching a leg higher after a double-bottom for gold in U.S. dollar terms (August 17th & September 27th) :
Click on the image for a larger size:
Gold in euro & yen terms with margin above 2013 lows
Divergence has resumed 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 127.09
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 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4585, continuing an impressive gain above the September 27th low.
Cheers,
Colonel Possum & Mariana
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