Old HWY 50 by North End Slag Piles
Eureka, Nevada (circa 1942)(photo looking south towards Eureka town site: former site of the Eureka Consolidated Mill on the right; slag piles on the left. Courtesy UNV Photo Archives)
Friday, March 22, 2019 AM
Next Week Target Gold Price: $1,320 per ounce, Target Silver Price: $15.52 per ounce.
High/Low range: $1,340/$1,300 per ounce
My 2019 Beer Bet: Gold will rise above $1,380 per ounce by May Day 2019
Here's an easy to understand overview on gold (32 slides, read explanation below each slide): History of gold and which countries have the most
Morning Miners!
Comex gold took a healthy bounce to $1,320.2 per ounce yesterday. This morning, the yellow metal has fallen back to trade at $1,311.6 but I believe there is more upside - look for gold to retest $1,320 next week.
Silver may surprise too but patience is the word (see next section). Comex copper is singing the blues falling below $2.9 per pound, presently at $2.8770. Increasing signs of global slowing and unexpected weakness in Germany have tarnished the red metal lately. Price could reverse on falling supply although the London Metal Exchange got healthy infusion of the stuff this week (please see "Scorecard" below).
Editor Allen Sykora included my thoughts in this mornings Kitco News Gold Survey:
Gold soared, although later in the week the yellow metal backed down from its highs. A dovish Fed tends to help precious metals two ways – by weighing down the U.S. dollar, which has an inverse relationship with gold, and by lowering the so-called “opportunity cost,” or lost income from holding metals instead of an interest-rate-bearing asset.
“The Federal Reserve cleared an obstacle for gold this week by implying they are done with rate hikes this year,” said Richard Baker, editor of the Eureka Miner Report. “The 10-year Treasury fell below 2.5% this morning in a rolling response to this decision coupled with expectations for slower growth in 2019. Inflation expectations have returned to their March high resulting in 10-year real rates fast approaching 0.5%.
“This substantially reduces the opportunity cost for holding a gold position and clears the runway for higher gold prices on future safe-haven demand.”
[The full report can be found below]
Market Dashboard Flashes Warnings
The following is an update from Friday morning:
Warning Light #1
Going to the next level of the mine shaft, we find that the Treasury yield curve has some inversions. Historically, this is a harbinger of recession but doesn't foretell exactly when. Some economists believe inversion signals trouble within 12-18 months.
Something to keep in mind: Inversions don't always foretell recessions but all recessions are preceded by inversions.
Here are the Treasury maturities and yields at market close Friday:
3-month 2.44%
6-month 2.46%
12-month 2.44%
2-year 2.32%
5-year 2.24%
10-year 2.44%
30-year 2.87%
Normally yields increase with maturity. In the above list, yields in red are smaller than the preceding yield - an abnormal condition. Importantly the 10-year has dropped to the 3-month yield of 2.44%. Not a good sign.
Warning light #2
According to Bloomberg news Friday:
The U.S. posted its biggest monthly budget deficit on record last month, amid a 20 percent drop in corporate tax revenue and a boost in spending so far this fiscal year.
The budget gap widened to $234 billion in February, compared with a fiscal gap of $215.2 billion a year earlier. That gap surpassed the previous monthly record of $231.7 billion set seven years ago, according to data compiled by Bloomberg.
Here's a way to look at this: total spending was $401 billion in February while the government took in $167 billion. There are 141.2 million individual taxpayers in the U.S. If everyone had to pony up the February deficit (which we don't, the Treasury just sells more bonds) it would work out to $1,660 per taxpayer. And that's just one month!
Ouch!
Warning Light #3
Finally, the much watched yield on the German 10-year Bund went negative today at -0.02%. From the yield & maturity list above, the comparable U.S. yield is 2.44%. Negative yields are a further positive for gold.
[Update: Monday, 3/25 the Japanese 10-year bond is also negative at -0.09%; Germany remains at -0.02]
Keep the faith! Gold will go further up the stairs in 2019.
This mornings' price action:
Comex gold (4/19 contract) $1,311.6 per ounce,
Comex silver (5/19 contract) $15.420 per ounce
Comex copper (5/19 contract) $2.8770 per pound
Have a good weekend!
My latest Kitco News commentaries:
What Do Stocks, Real Rates & Japanese Yen Tell Us about Gold? (Kitco News, 1/22/2019)
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
What About Silver?
Last week I said a breakout for silver above $16 per ounce may occur in the coming weeks and cautioned to watch the Indian rupee. The rupee has been strengthening below 70 USD/INR and savvy investors in India have been buying U.S. dollars. This has not translated into a move higher for silver in dollar terms...yet.
Today the rupee is 68.97 up (i.e. weaker) from its 68.60 low Monday, March 18th.
However, a gold-to-silver ratio (GSR) around 85 is ready for a move down - bullish for silver if the Lustrous One recovers more territory. This morning the Comex GSR is 85.06. This chart shows the peak GSR was 86.16 last November (click for larger image size).
Gold-to-Silver Ratio
Historical note:
If gold and silver are legal tender (see gold overview link below headline photo), then you have to come up with a set value for them and figure out which is more valuable than the other. In 1792, the U.S. fixed its price at 15:1. This means that 1 troy ounce — the long-used standard for measuring precious metals — of gold was worth 15 troy ounces of silver. Over the years, as this ratio has changed, precious metal investors have used it as a signal of when to buy.
At 85:1, silver is very cheap relative to gold!
Stay tuned.
Inflation Watch
Inflation expectations made a high April 23, 2018 above trend lines of higher lows (dotted lines, click on chart for larger size). Those trend lines were broken dramatically to the downside late last year but now recovery appears to be underway as shown in this chart:
10-year Inflation Expectations
Note: In the above chart inflation expectations peaked at 2.14% February 2, 2018 and then moved higher April 23 to 2.18%. May 29 broke a trend line of higher-lows falling to 2.04%. The older trend lines of higher-lows are shown in dark blue. Those trends extend from June 21, 2017 low of 1.66%. Currently, we are recovering from the January 3 low of 1.68% and now above the level of November 27, 2017 (red dashed line). The Wednesday expectations are maintaining some upward momentum at 1.96%.
My latest Kitco News commentary explains the importance of tracking "real rates" which are a function of inflation expectations:
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
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 these columns are updated in this report.
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 (note new continuous chart baseline):
Gold $1,365.4 per ounce (continuous chart April, 2018)
Silver $18.160 per ounce (continuous chart September 2017))
Copper $3.2955 per pound ($7,265 per tonne, continuous chart December 2017)
Comex copper fell 1% for the week on global slowing fears. Presently trading at $2.877 per pound ($6,343 per tonne), the red metal is now 12.7% below the December 2017 high. Maintaining prices above $6,000 per tonne is a key benchmark to price recovery; above $6,500 is bullish.
Improving global growth had kept the red metal above the key $3 per pound-level in 2017. Initial trade war fears in 2018 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 had revived on optimism about a March resolution of the U.S./China conflict. A stunning drop in February exports and downward revision of the official GDP target weighs on prices.
Total copper stored in LME and Nymex warehouses is 0.226 million tonnes, sharply up on the week but still less than one-half the 0.5 million tonne mark of early-2018. The Nymex warehouse tonnage is behind the LME still below the 50,000 tonne mark.
LME inventories up sharply this week:
It is instructive to keep our eyes on the Nymex inventories are still falling (LME 179,275 versus Nymex 47,614 tonnes):
My Input to Kitco News
Next Week target gold price $1,320 per ounce. Target silver price $15.52 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
The Federal Reserve cleared an obstacle for gold this week by implying they are done with rate hikes this year. The 10-year Treasury fell below 2.5% this morning in a rolling response to this decision coupled with expectations for slower growth in 2019. Inflation expectations have returned to their March high resulting in 10-year real rates fast approaching 0.5%.* This substantially reduces the opportunity cost for holding a gold position and clears the runway for higher gold prices on future safe-haven demand. With unresolved U.S./China trade and Brexit deals on the table against a background of global slowing, it is reasonable to believe a return to safe-haven assets is likely.
Although the Indian rupee remains below 70 USD/INR, some savvy investors there are buying U.S. dollars. It remains to be seen whether this will translate to buying gold and silver in dollar terms. However, a strengthening rupee remains a bullish indication.
All in all, I believe gold will see additional lift to $1,320 per ounce next week on its path to $1,380 per ounce by May. My target gold price is $1,320 with silver following at $15.52 per ounce.
* currently inflation expectations are 1.96% compared to the January bottom of 1.68% (1/13/2019), source: FRED; current 10-year real rates are 0.54%, down 20 basis points year-on-year, source: Bloomberg
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. Something to watch: the yuan dramatically weakened from mid-April 2018 and now appears to be strengthening again.
The yuan stayed below 7.0 USD/CNY for 2018, starting stronger and then followed by a weakening trend. It has re-strengthened in 2019. The yuan is currently at 6.7124 USD/CNY but with still a lot of daylight above the March 26, 2018 low (i.e. much stronger level) of 6.2342. 1-month yuan volatility is a low 0.17%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.42% & 0.41% respectively; Comex gold 1-month volatility is 1.09%.
Weekly Summary March 22, 2019
Yearly Summary for 2018
Yearly Summary for 2018
(click on table for larger size)
Although Comex gold price lost some steam in 2018 (down 2.1%) it made healthy gains on key commodities copper and oil (up 22.8% & 30.2%). Against the broader Bloomberg Commodity Index (BCOMTR:IND), it advanced a respectable 10.3%.
Importantly the yellow metal outpaced the S&P 500 stock index by 4.3% making it a better investment than domestic stocks for 2019. This leaves gold it in a strong position for 2019.
Only the Japanese yen, an alternative safe haven, fared better by gaining 4.1% over gold for the year.
Yearly Summary for 2017
(click on table for larger size)
Comex gold gained nearly 14% for 2017 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 Outlook for 2019 (1H)
My 2019 Beer Bet: Gold will rise above $1,380 per ounce by May Day 2019
The first-half of 2019 will be a push-pull to higher $1,380+ gold prices underpinned by a trend of higher lows. This outlook is based on a weakening U.S. dollar and real interest rates that have peaked for the near-term against a volatile backdrop of Washington and geopolitical uncertainty.
Over the last five years, gold has been negatively correlated with 10-year real rates 71% of the time. This is reassuring given the popular assumption about opportunity cost for holding a gold position – the higher real rates go, the more costly to keep a non-interest bearing asset like gold. Falling real rates support rising gold prices and vice-versa. Less often, more dominant drivers are at play and gold price appears insensitive to changes in real rates. The low gold price volatility from mid-April to late-September is a good example. Over this time, the yellow metal behaved as a currency. It was highly correlated with the Chinese yuan; to a lesser degree, the euro and yen; and much less, to real rates.
Which case will be true for the first half of 2019? My latest Kitco Commentary posits the former to be the most likely which is bullish for gold:
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
In addition to real rates, other important charts to monitor are 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 up for the week. It has generally trended higher from a double-bottom in U.S. dollar terms (August 17 & September 27, 2018) :
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 at 125.85, it is divergent from parity.
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 October 1, 2018 (0.4063). Currently this AM the AUSP is at 0.4627 and below the high of 0.5409 set at the close December 21, 2018. Importantly, the ratio had bullishly broke the upper rail (dotted green line) of the downward trending channel but has bearishly returned below.
Cheers,
Colonel Possum & Mariana
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