The Eureka Miner: Gold Falls Below $1,550 on Pandemic Sell-Off; Markets Venture Bear Country

The Peace & Serenity of a Wood Stove (Winter 2010)

Eureka, Nevada

Friday, March 13, 2020 AM

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UPDATE (Friday 3/13/20 closing prices)

Comex April gold $1,516.7 per ounce

Comex May silver $14.50 per pounce

Comex may copper $2.4640 per pound

Nymex WTI crude oil $31.23 per barrel

S&P 500 closed up 9.29% at 2,711.02 after the President declared a National Emergency. This is down 20.1 % from the all-time intraday high of 3,393.50 set 2/19/2020 - one foot into Bear Country.

"I cannot overstate the potential harm the coronavirus can do to the world economy." (Eureka Miner, January 31, 2020)

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Follow the ole Colonel on twitter @Eurekaminer

Next Week Target Gold Price: $1,620 per ounce, Target Silver Price: $15.99 per ounce

My latest Kitco News commentary: Copper, gold & the coronavirus (2/18/2020) [summary of recent commentaries given at the bottom of the blog]

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!

Novel coronavirus (covid-19) becomes a global pandemic and the Russians and Saudis declare an oil price war. Ouch!

We're coming to the end of a historic week for U.S. markets. The benchmark Dow Jones Industrial Average is heading to close at its highest weekly percentage drop ever. All major stock indexes are in bear country, more than 20% below their recent all-time highs. The CBOE Volatility Index (VIX), often called the "fear index", is at levels not seen since the 2008-2009 Financial Crisis. To put that index in perspective: a VIX of 50 means there is a 50% chance the S&P 500 will be up or down 50% in one year. This morning the VIX is above 70.

When things get this crazy, there is typically a wave of selling to raise cash. Gold was no exception. Last Friday, I said it was likely that Comex April gold would break the $1,700-level. It did Sunday night scoring $1,704.3 per ounce. Selling pressure during the week pushed it down to a low last night of $1,551. This morning, April gold falls to 1,544 as I write this paragraph (8:56 am Eureka time). My earlier Kitco input (below) saw gold recovering above the $1,550-level. Crazy. [Update: Comex gold would test $1,504.0 before closing at $1,516.7]

I still believe this selling should clear by next week and it is likely that prices will find a home again above $1,600. Silver is faring less well as the gold-to-silver ratio jumps above 100 ounce per ounce (see Silver Watch below). Comex May silver is presently trading at $14.72 per ounce. Let's see what happens to prices at the close. [Update: Comex silver would test $14.425 before closing at $14.50]

What's going on?

Here's how I explained my outlook to the Kitco News Weekly Gold Survey this morning:

Objects in a vacuum fall at the same rate. The same could be said about markets as stocks and safe-haven gold fell in a vacuum of knowledge about the impact of covid-19 and the Saudi/Russia oil price war would have on the global economy. Market participants broadly sold assets to raise cash and cover margin calls. This morning a clearer policy response from the U.S. appears to have arrested free fall. Domestic stocks are rallying and Comex April gold has recovered from testing the $1,550-level after breaking 1,700 per ounce earlier in the week.

The best news for gold this week was its performance relative to the embattled S&P 500. Gold has recovered all the value lost to this equity benchmark since the 2018 Presidential election...and more. Even while dropping below $1,600, the gold-to-S&P 500 ratio (AUSP) spiked to levels not seen since late-2016.* From October 2018 the AUSP has been on an uptrend of higher-lows; gold has doggedly gained value on equities. This is a bullish sign going forward leaving the path clear for the $1,800-level in 2019 [see Chat to Watch below].

The interest rate picture is slightly less supportive this week. 10-year inflation expectations dropped like a rock to the 1%-level and, while not falling as fast as 10-year Treasury yields, negative real rates are now near zero [see Inflation Watch below]. For weeks, the negative 10-year real rate has been solidly negative sustaining a very bullish environment for a non-interest earning asset like gold.**

I believe gold will move back up to the $1,620-level next week as selling clears and struggling silver recovers to $15.99 as the gold-to-silver ratio crests above the 100-level [Silver Watch]..

* AUSP 0.6162 this AM; yesterday the AUSP high was 0.6242 (Thursday 3/12/20)

** 10-year U.S. real rate -0.01%; 10-year bonds: German Bund -0.58%, France -0.02% and Japan -0.01%;

This morning, Comex copper is below the key $2.5-level at $2.4830 per pound

China, which still represents copper's highest demand, is on the mend. Here is my China Indicator updated through this morning (see above 2/18/2020 Kitco column). A low number is good. A bottom occurred after the signing of the Phase I deal of 0.3011. This AM the indicator sits at 1.1356 below the coronavirus peak of 1.8399 set February 11 (click on chart for larger size). Are we off to a second peak (red arrow)? If not, the first phase of the pandemic is stabilizing in China - a good sign!

China 2-rho Divergence Indicator

I've been actively tweeting market news/events during the week so please follow me at @Eurekaminer. I usually tweet Sunday night on the Monday Shanghai Futures Exchange (SHFE) for a heads up on copper & gold prices in the Year of the Rat.

Remember, you can register with the Centers for Disease Control and Prevention (CDC) for updates by e-mail. Look at the situation summary tab on their website for updated U.S. infections and deaths.

Flashback

It was eerie that Monday's big market sell-off (3/9/20) was exactly 11 years from the Monday of the S&P 500 closing low (3/9/09). The intraday low the Friday before was 666.79 (3/6/09). This week technically ended an 11-year bull run with the S&P 500 closing down 20.1% from its recent all-time high 3,393.52 (2/19/20). On a percentage basis the S&P advanced 409% peak-to-trough. Something to think about.

Here are my notes from that fateful Monday of yore:

Market Notes from March 9, 2009

The first Eureka Miner followed 14 days later on March 23rd, 2009. Still tickin'

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 is below $15 per ounce showing continued weakness relative to gold (see Weekly Summaries above).

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 today of 101.3 ounce per ounce solidly above July 11 high of 91.3 - a trend down from this top is bullish for silver if the Lustrous One continues its rally.

At 101.3, silver is historically very, very cheap relative to gold!

The 10-year average GSR is much lower at 68.1 ounce per ounce.

The 3-month beta with gold fell further this week, currently a very unattractive 0.13 (i.e. on average, the daily % rise or fall of silver price is beta times the % change in gold price). You prefer a high beta (i.e. greater than 1.00) when gold rallies higher.

(click on image for larger size)

Gold-to-Silver Ratio

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. They have tracked steadily down from there with a dive to the 1% level this week. Expectations are falling at a slightly faster pace than 10-year U.S. Treasury yields resulting in negative real rates (see Weekly Summary Charts) - a bullish trend for a non-interest earning asset like gold.

10-year Inflation Expectations

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 Monitor

Here's a chart to monitor for 2020 (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 reversed into a downward channel bottoming again October 1, 2017 (0.4063). Currently this AM the AUSP is at 0.6162 above the high of 0.5409 set at the close December 21, 2018. Importantly, the ratio has aggressively left the downward trending channel with an uptrend trend of higher-lows starting with the October 2018 low. This week the ratio put lots and lots of daylight above that trend - bullish gold!

Six Things to Watch in 2020

The ole Colonel's beer bet (won on an intraday basis Tuesday, January 7th!). I have since revised it [parenthesis]:

Gold will break [on a closing basis] $1,600 per ounce before the 4th of July 2020

We'll keep the bet alive by looking at closing instead of intraday prices - what a sport! [won on a closing basis February 18th]

My top six things to watch for 2020:

Copper prices - I'd like to see copper prices 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 - for example, U.S./China trade Phase I in trouble or escalating geo-political unrest. [Update: Covid-19 has pushed copper below $6,000 per tonne].
Chinese yuan - strengthening below 7 USDCNY is a good sign that their economy and trade are on an improving track (Weekly Summary). Sustained weakening above the 7-level is a red flag. [Chinese yuan is below 7 USDCNY again, an encouraging sign]
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). This reports tracks the Invesco DB US Dollar Index Bullish Fund (UUP) (27.01 September high, see Weekly Summary below for latest price). 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.
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. [Update: Covid-19 appears to have reversed the trend higher, 10-year Treasury is at record lows].
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).
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). We entered 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold. [Update: Covid-19 has put the AUSP solidly above trend].