"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, October 5, 2018

Gold $1,209 on Solid Jobs Report; Soaring Interest Rates - Ouch!

Old School Euclid Haul Truck
Windfall Mine (photo Eric Pastorino)
Eureka, Nevada

Friday, October 5, 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: $1,210 per ounce Target Silver Price: $14.74 per ounce.


Morning Miners!

The monthly jobs report rolled in at 5:30 Eureka Time. After some head scratching, I believe the news is good, perhaps very good. Comex gold briefly popped to $1,209.0 upon the release, now trading at $1,206.0 per ounce.

Hurricane Florence was a complicating factor so September new jobs came in at 135,000 and far below economists' expectation of 180,000. However, July and August numbers were revised upwards by a whopping 87,000.  The headline unemployment, taken by a separate survey, was a stunning 3.7% - the lowest number since the 1969 Camaro.


That's 49 years ago for the old timers that still dream about those days.

The average monthly employment gain over the last 12 months is 201,000. Average hourly earnings were also up a healthy 0.3% to $27.24 an hour. My rule-of-thumb is bump up of greater than 0.1% is encouraging and may come with a whiff of inflation.

Cable News talking head reaction to these numbers was mostly positive, "evidence of sustained expansion", "exceptional revisions" and "a Goldilocks scenario." 

On a more sobering note, yields on U.S Treasuries soared this week putting the 10-year above 3.1% and the 30-year above 3.25%. Higher government rates benchmark consumer debt so this puts some concern in your pocket book. For example, fixed-rate home loans track Treasuries; the 10-year note affects 15-year conventional loans while the 30-year bond affects 30-year loans.

There are two sides to this. The positive is that a healthy growing economy naturally demands and can afford higher interest rates. A darker interpretation is that foreign investment interest in buying U.S. Treasuries is waning. Both are true, it's the balance of these factors that needs monitoring. For a long time, negative interest rates in Europe and elsewhere brought a lot of foreign investment into the treasury market driving prices up. This kept U.S interest rates low (higher prices result in lower yields). Divergence in Central bank policy and currency rates have made this trade less desirable. In addition, some large holders of U.S. debt like China are now net sellers.

On the short end, the Federal Reserve has seen little reason to slow their trajectory of raising the Fed funds rate with another bump up just last month (the benchmark interest rate is now in a range of 2% to 2.25%). The prime rate, which is used to set Home Equity Line of Credit (HELOC) interest payments, tracks the Fed rate.

What does all this do to gold prices moving forward?

Here's how I explained things to Editor Allen Sykora of the Kitco News Weekly Gold Survey this morning:

Richard Baker, editor of the Eureka Miner Report, said Comex gold showed resilience trading above $1,200 an ounce despite a “solid” September jobs report, rising 10-year Treasury yields and 10-year real interest rates creeping higher. “At a minimum, I believe the near-term low is in for gold and the August-September double-bottom ($1,167.10 and $1,184.30, 12/18 contract) signals the yellow metal should trend higher from here,” Baker said.

“Why the optimism? Although normally a headwind for gold, yields marching higher will become an increasing drag on domestic equities, which remain near all-time highs. The stranglehold of rising stocks and falling gold prices may finally be near a turning point allied by gradually accelerating inflation in the U.S.”

My full report is given below.

This mornings' price action:

Comex gold (12/18 contract) $1,206.0 per ounce, 
Comex silver (12/18 contract) $14.695 per ounce
Comex copper (12/18/ contract) $2.7830 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. No chart this week because the Chinese are on holiday. Elephant returns to the room Monday.

[Chinese on Holiday]

"So goes the yuan goes, so goes gold."

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)

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 moved more or less sideways. There is a hint now of slowly accelerating inflation (please 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% two weeks ago. This Wednesday expectations were 2.16%. 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). We have broken 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 only slightly lower than last week at $2.7830 per pound ($6,135 per tonne), now 16.5% 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%). Supply restrictions have supported prices recently and Chinese traders are away on holiday this week.

Total copper stored in LME and Nymex warehouses is 0.364 million tonnes, well below the 0.5 million tonne mark of earlier this year.

LME inventories are still declining again after a run-up in August:



It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 194,175 versus Nymex 170,177 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 $1,210 per ounce. Target silver price $14.74 per ounce.

The good news for Comex gold this morning is its resilience above the $1,200-level given a solid September jobs report, soaring 10-year Treasury yields and 10-year real rates creeping higher*. At a minimum, I believe the near-term low is in for gold and the August-September double-bottom ($1,167.1 & $1,184.3, 12/18 contract) signals the yellow metal should trend higher from here.

Why the optimism? Although normally a headwind for gold, yields marching higher will become an increasing drag on domestic equities which remain near all-time highs. The stranglehold of rising stocks and falling gold prices may finally be near a turning point allied by gradually accelerating inflation in the U.S.

The elephant that is not in the room is China. When traders there return from week-long holiday, it will be important to monitor the yuan and copper prices. Gold has been highly correlated with the Chinese currency since this spring, will that relation also reverse? Copper prices, currently supported by supply constraints, have been held back by a slowing global economy ex-U.S. - will the red metal and gold now move in opposite directions**? 

 Even with these questions, I remain cautiously bullish that gold will find comfort at the $1,210 level next week with silver following slightly higher to $14.74 

* real 10-year rate is now above 1% 
** the 1-month rolling correlation of gold and copper is currently near zero

[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 6.8679 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. However the yuan has been frozen at that level all week because the Chinese are on holiday. A 1-month yuan volatility of TBD% until next week- something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.72% & 0.85% respectively; Comex gold 1-month volatility is a low 0.50%


Weekly Summary  for October 05,2018 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: 

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 131.25 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 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4147 up from last week's new low and above 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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