Kitchen's Market
Eureka, Nevada
Friday, October 16, 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)
Follow the ole Colonel on twitter @Eurekaminer
Next Week Target Gold Price: $1,920 per ounce, Target Silver Price: $24.67 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 for the week nearly a percent but nicely treading water. The ole Colonel remains bullish for 2020. Here's where we're trading: gold pulling back from $1918,7 per ounce:
Comex December gold is presently trading at $1,909.1 per ounce (8:06 am Eureka Time).
Comex December Silver is currently trading at $24.43 per ounce (8:06 am Eureka Time).
Comex December copper is presently $3.0635 per pound (8:06 am Eureka Time)
This is how I explained my gold and silver outlook to the Kitco Weekly Gold Survey:
Not exactly a fun day at the beach for markets, lots of cross-currents and a few rip tides. This morning is a good example: U.S. retail sales surprise to the upside, industrial production surprises to the downside. As gold holds its ground above the $1,900-level, market participants appear pleased to have the lustrous lifeguard on duty but few are crying for help. December Comex prices are locked in a new wedge defined by September highs and lows ($1,983.8 and $1,851.0) suggesting a breakout higher if a bad headline or two washes beachgoers out to sea.
What are the cross currents? Currencies and interest rates offer some clues. China's yuan has been strengthening since late May as their economy returns to pre-pandemic levels and the virus there is relatively contained. In stark contrast, the euro has been trending lower since early-September as a second wave of infections puts a chill on their recovery. The German bund tumbled a full 10 basis points more negative this week as the U.S. 10-year Treasury bumped a few higher. With startling higher case rates in many states, it seems the U.S is on a path with Europe to more challenging times.
Gold will likely remain in the wedge next week - my targets are Comex gold $1,920 with silver following to $24.67. 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:
- 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.
- 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.
- 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 nearAugust levels (1.69% vs. 1.80%)
These are the strange times of coronavirus.
Stay safe my friends.
Chart for the 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 good. Last Friday's closing numbers suggest a troubling move back up (d=1.1038) above the 6-year average (d=0.78). If divergence breaks above the falling trend line (dashed blue arrow), there may be trouble ahead for everyone.
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, the latest monthly data is through July 2020:
Gold Record (2011) x [CPI (7/2020)/CPI (9/2011)] =
$1,923.7/t-oz x [258.723/226.597] = $2,196/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, 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: 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
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