Gold Falls from $1,936 Wednesday High; Breakout Higher Post-Election

 

Willow Creek Ranch

Eureka County, Nevada

Friday, October 23, 2020 AM

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

Eureka County, NV Coronavirus Hub

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Next Week Target Gold Price: $1,920 per ounce, Target Silver Price: $24.93 per ounce

My latest Kitco News commentary: Is silver near a top? (7/27/2020, Kitco News) [summary of recent commentaries given at the bottom of the blog]

Baker: Gold in the time of coronavirus (Elko Daily Free Press, 6/4/2020)

An easy-to-understand overview on gold (32 slides, read explanation below each slide): History of gold and which countries have the most

Morning!

Gold is down from its Wednesday high of $1,936 but don't despair. The ole Colonel remains bullish for 2020 - I believe we will see a breakout higher post-election. Here's where we're trading:

Comex December gold is presently trading at $1,901.1 per ounce (8:32 am Eureka Time).

Comex December Silver is currently trading at $24.69 per ounce (8:33 am Eureka Time). 

Comex December copper is presently $3.1395 per pound (8:32 am Eureka Time)

This is how I explained my gold and silver outlook to the Kitco Weekly Gold Survey:

Lacking a late-October surprise, it is challenging to imagine a market driver that will move the lustrous metal from its resilient meanderings of late until post-election. December Comex prices remain locked in a wedge defined by September highs and lows ($1,983.8 and $1,851.0). This suggests a breakout higher in November given the lengthening shadows of coronavirus infections both here and in Europe. Europe PMI today indicating contraction is a good example. I believe gold will move just above the middle of the wedge next week to $1,920 per ounce with silver following to $24.93 per ounce.

It has been much more exciting to monitor interest rates this week. Globally they are on the rise with the 10-year approaching mid-June levels (0.86% vs. 0.90%). Here's the good news for gold: inflation expectations are also headed north. The 5-year real rate increased negativity a full 7 basis points to -1.31% which is very bullish for precious metals (point 3 below). 

China's yuan also continues to strengthen from late May as their economy approaches pre-pandemic levels and the virus there is relatively contained. Concurrent with this currency strength is the rise of copper prices above $7,000  per tonne [$3.1752 per pound], China comprises 50% of the global demand for the red metal. This underlines the growing disparity between covid-recovering economies while the U.S. and Europe face a new wave of cases. This disparity will fuel market uncertainty further supporting gold prices into the new year.

My target for 2020 remains unchanged at $2,200 for gold and $32 for silver.

Three conditions for higher gold remain since gold's all-time record:

1. There remains plenty of domestic and geo-political uncertainty to support safe havens: U.S. election controversy, a stalled recovery package in Congress, a stubbornly pervasive covid-19 virus, civil unrest and simmering U.S./China tension.

2. The longer-term fortunes of the U.S. dollar grow dimmer with more expected Federal Reserve and U.S. Treasury largesse when a relief package does eventually pass.

3. Negative U.S. benchmark real rates continue - bullish for non-interest earning assets like gold and silver. Notably, recent inflation expectations have ticked back up to near August levels (1.76% vs. 1.80%) These are the strange times of coronavirus. Stay safe my friends.

Chart for the Week

Our Chart for the Week is an update from last week.The ole Colonel is closely monitoring correlations of copper with gold and also the Chinese currency. China's economy is recovering to near pre-pandemic levels and they account for about one-half of global copper demand. Therefore, a positive indication for China is a strengthening yuan coupled with demand-driven copper prices. However, when gold and copper prices go in different directions there is often trouble afoot. Presently, pessimism about global recovery with new waves of coronavirus in Europe and possibly the U.S. has caused come de-correlation of the red and yellow metals (click on image for larger size):

Correlation Map of Copper with the Yuan & Gold

The divergence between the two correlation trajectories is shown by the dashed magenta arrow. You can learn more about how this works in a Kitco column I wrote earlier this year:

Leading indicator for U.S./China trade - copper, gold & yuan (1/13/2020, Kitco News)

If we plot divergence (d) versus time, you can see how the U.S./China trade tensions caused spikes in divergence last year (Point A) and also how the coronavirus initially impacted China (Point B). In this chart, a low number (i.e. low divergence) is considered good. There has been a move back up (d=1.37010) above the 6-year average (d=0.78) but the peak may have occurred yesterday (1.38750). Divergence breaks above the falling trend line (dashed blue arrow), remains troubling. I will monitor this closely.

China 2-rho Divergence Indicator

WHAT IS THE RECORD GOLD PRICE?

The new all-time Comex gold record is $2,089.2 (December contract)

What makes a record gold price? There are many correct answers to this question, different answers but no less true. Some folks refer to the spot gold price on a particular day others futures prices. They may cite a closing or intraday number. For the purposes of this report, the "all-time record" refers to the highest intraday price on the Comex futures exchange for the most active front-month contract.

The old record was $1,923.7 per ounce.

That occurred on Tuesday, September 6, 2011. I reported on the record intraday price the following day in this Eureka Miner:

Gold Trips; Copper & Oil Bounce (Eureka Miner, 9/7/2011)

WHAT IS THE INFLATION-ADJUSTED 2011 GOLD RECORD? [Updated for latest CPI]

You can bring the 2011 gold record forward in time by using the Consumer Price Index (CPI). The government data is easily accessible on the internet. The numbers below were taken from a chart provided by the Federal Reserve Bank of St. Louis in a database called FRED (Federal Reserve Economic Data). Here's the formula, given the monthly data through September 2020:

Gold Record (2011) x [CPI (7/2020)/CPI (9/2011)] = 

$1,923.7/t-oz x [260.209/226.597] = $2,209/t-oz

An even easier method is to use one of the many inflation calculators on the internet that use CPI. This link takes you to one provided by the Bureau of Labor Statistics (BLS).

$2,200 is therefore a reasonable next target for gold price this year if you believe, as the ole Colonel does, that the rally continues.

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:

Is silver near a top? (7/27/2020, Kitco News)

Gundlach copper-gold indicator: low volatility in unexpected places (4/28/2020, Kitco News)

Copper, gold & the coronavirus (2/18/2020, Kitco News)

Leading indicator for U.S./China trade - copper, gold & yuan (1/13/2020, Kitco News)

Is Jeffrey Gundlach right about copper, gold & interest rates?  (12/23/2020, Kitco News)

Gundlach indicator: stable copper-gold means low yield volatility (11/11/2019, Kitco News)

Gundlach indicator: copper, gold & treasury yields at a tipping point (10/14/2019)

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)

Cheers,

Colonel Possum & Mariana