Main Street Eureka (December 2010)
Eureka, Nevada
Follow the ole Colonel on twitter @Eurekaminer
Next Week Target Gold Price: $1,510 per ounce, Target Silver Price: $17.92 per ounce.
My latest Kitco News commentary: Is Jeffrey Gundlach right about copper, gold & interest rates? (12/23/2019)
An easy-to-understand overview on gold (32 slides, read explanation below each slide): History of gold and which countries have the most
Happy New Year Miners!
We're closing the year with our favorite metals catching a gear higher. Earlier this morning Comex February gold touched $1,519.9 per ounce, March silver scored $18.05 per ounce and the red metal came within a whisker of yesterday's high of $2.8565 per pound. The S&P 500 and other major stock indexes remain in record-breaking mode (today's new intraday high 3,247.93). We'll see how the markets close but things are looking up as we enter a new decade next week.
Kitco News did not conduct a survey today, so I'll leave you some thoughts for 2020. I believe there is more than a good chance that gold will break $1,600 by mid-year. Let's make it a beer bet:
Gold will break $1,600 per ounce before the 4th of July 2020
You may ask why I'm not even more optimistic about gold's level - some experts are a predicting prices north of $1,600. The yellow metal can't escape the headwinds of rising equity markets (see Chart to Watch below) but is also buoyed by residual U.S./China trade issues, next steps in the Brexit saga, new threats from North Korea and escalating tensions in the Middle East (enough booger bears for now!). So far, the coming election year and Washington impeachment drama have not affected gold prices...yet.
I'm betting the push-pull of bearish and bullish forces will bring higher gold prices in the first-half of 2020.
My top six things to watch for the New Year (this list was five things when I sent out my mailer, I added a sixth Saturday morning):
- Copper prices - I'd like to see the current rally push us above $6,500 per tonne ($2.95 per pound). A fall below the $6,000-level ($2.72) would be a bad sign, U.S./China trade Phase I in trouble perhaps.
- Chinese yuan - strengthening below 7 USDCNY is a good sign that their economy and trade are on an improving track (today 6.9954). Sustained weakening above the 7-level is a red flag.
- U.S. dollar - will it remain strong or begin a period of decline? Foreign demand for Treasury debt has kept the dollar strong but rising U.S. deficits and countries trying to move away from dollar dependence (e.g., China, Russia) are countervailing forces not to be ignored. The U.S. Dollar Index (DXY) made its high September 30 this year and has been in a downtrend of lower-lows since (99.38 September high, 97.71 today). This reports tracks the Invesco DB US Dollar Index Bullish Fund (UUP) (27.01 September high, 26.10 today, Weekly Summary below). Finally, overseas interest in Treasurys has been fueled by negative interest rates abroad. This report monitors the German 10-year bund (Weekly Summary) as a benchmark for foreign Treasury demand. The bund yield is currently -0.26% compared to a Treasury yield of 1.87% giving the U.S. debt still an attractive 2.13% differential.
- Interest Rates - there is an almost uncanny relationship between the yield on the benchmark U.S. 10-year Treasury and the copper-to-gold ratio (CGR, Weekly Summary). I've written about this extensively since 2017 ( see The Colonel's Latest Kitco News Commentaries below). Bottom line, a rising CGR signals higher interest rates for 2020.
- Real rates - The 10-year inflation adjusted Treasury yield, or real rate, is the difference between the nominal yield and inflation expectations (aka 10-year "break-even" rate). Since gold is a non-interest bearing assets it performs best when real rates are near zero or negative. This report tracks real rates (Weekly Summary) and inflation expectations (Inflation Watch). Since gold is often considered an inflation hedge it is prudent to track both. In 2020, inflation may pick up (gold bullish) but if interest rates rise faster, an increasing real rate dampens interest in in the yellow metal (gold bearish). Presently, real rates are near-zero (+0.13%) and inflation expectations are a modest 1.74%.
- Gold-to-S&P 500 ratio (AUSP) - Gold's relationship with equities is key to monitor. Gold lost value to the S&P 500 from Donald Trump's election until October of 2018. Since then it has regained value in a trend of higher-lows (see Chart to Watch below). We enter 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold.
Predictions aside, 2020 will no doubt be an exciting year in the markets. Get ready for a roller-coaster ride, pardner. I remain bullish gold!
Happy New Year!!!
The Colonel's Latest Kitco News Commentaries
Please checkout my latest Kitco News columns on the stunning relationship of copper and gold prices with interest rates:
Gundlach indicator: stable copper-gold means low yield volatility (11/11/2019, Kitco News)
Gundlach Indicator: treasury yield and copper-gold ratio plummet (9/03/2019, Kitco News)
Robust Revival of Gundlach's 10-yr Treasury Relation with the Copper-Gold Ratio (6/17/2019, Kitco News)
Here is the latest model of U.S. Treasury yields based on the copper-gold ratio (click on image for larger view):
10-year U.S. Treasury Yield based on Copper-to-Gold Ratio
In the above chart, model coefficients were calculated at last Friday's close (12/20). Note how well the model and actual yields track for this morning's data (within 0.6 basis points). New coefficients will be computed next Friday.
Weekly Summary
Here is a weekly summary chart of gold and my 16 favorite market variables. They are grouped in categories "Commodities", "Interest Rates", "Indexes" and "Currencies" of 4 variables each. Over time, each variable has played some part in the gold story. It is prudent to monitor all 16 to understand the key price drivers that are currently active for the yellow metal. Importantly, this is not a unique collection of variables but one that works well for the ole Colonel
Because The Eureka Miner is a morning report, Friday AM prices are compared with the closing prices of the previous week (click on charts for larger size):
This weekly chart of comparative value tracks the value of gold relative to key currencies, commodities and indexes :
Silver Watch
Comex silver returned to $18 per ounce territory this week.
Please check this out if you get the silver bug:
How to Invest in Silver (Debbie Carlson, U.S. News & World Report, August 1, 2019)
How to smartly buy gold and silver:
How to Mine Physical Precious Metals for an IRA (Debbie Carlson, Barrons, Sept. 8, 2019)
The gold-to-silver ratio (GSR) set a new high July 11 at 91.3 ounce per ounce - a trend down from this top is bullish for silver if the Lustrous One rallies.
At 84.26, silver is historically very, very cheap relative to gold!
The 10-year average GSR is much lower at 67.7 ounce per ounce.
The 3-month beta with gold is an attractive 1.83 (i.e. on average the daily % rise or fall of silver price is 1.83 times that of gold).
(click on image for larger size)
Gold-to-Silver Ratio
Note that this week, the GSR is right at the long-term trend line of higher-lows established in April 2011 when silver flirted with $50 per ounce. A GSR falling below this trend is bullish silver.
Historical note:
In the past, when gold and silver were legal tender (see gold overview link below headline photo), it was important to set a value relationship between them. In 1792, the U.S. fixed its price at 15:1. This means that 1 troy ounce 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.
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. Expectationsaree on the rise again from the October, 2019 low.
10-year Inflation Expectations
Note: In the above chart inflation expectations peaked April 23, 2018 at 2.18%. May 29 broke a trend line of higher-lows. This week, expectations are presently 1.74% as of Thursday up from the October 3 low of 1.48%.
Many believe, including the ole Colonel, that gold price is more sensitive to inflation expectations than other measure of inflation. My January 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)
Old Glory
Eureka, Nevada
Chart to Watch
Here's a chart to watch for 2019 (Click on the image for a larger size):
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 reversed into a downward channel bottoming again October 1, 2017 (0.4063). Currently this AM the AUSP is at 0.4677 and far below the high of 0.5409 set at the close December 21, 2018. Importantly, the ratio has left the downward trending channel with a new trend of higher-lows starting with the October, 2018 low. That trend is now challenged (red arrow & circle).
Cheers,
Colonel Possum & Mariana
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