Gold Below $1,300 - Why I'm Not Worried; Inventory Weighs on Copper

March 1, 1954 Hydrogen Bomb Test
Bikini Atoll

Friday, September 22, 2017 AM

Morning Miners,

What a week.

My thoughts yesterday: Mightier than a North Korean ICBM, mightier than a super-storm, the Fed proves once again it can stir up the markets...at least the gold market. Comex gold dips to $1,291.2 per ounce on hawkish comments from Fed Chair Yellen on interest rates and unwinding of its $4.2 trillion balance sheet.

My thoughts this morning: North Korea's threat to explode an H-bomb over the Pacific trumps Yellen. Comex gold heads back to the key $1,300-level, trading presently at $1,298.8 per ounce.

A quick look in the rear view mirror as summer turns to fall:

Intraday highs on the Comex futures exchange (all December contracts):

Gold $1,362.4 per ounce September 8, 2017

Silver $18.290 per ounce September 8, 2017

Copper $3.1785 per pound ($7,007 per tonne) September 5, 2017 

I think gold can regain its September high before fall turns to winter, perhaps higher if North Korean tensions increase. An argument for why gold's dramatic pullback this week was an overreaction to Fed is given below in my weekly input to Kitco News.

Here's an interesting fact: even with gold's drop below $1,300 this week, the yellow metal gains this year still exceed those of the record breaking S&P 500 by nearly 1%. Something to think about before you turn bearish on gold.

The new H-bomb threat was heard around the world blunting the U.S. dollar advance and tumbling base metal prices -  especially copper, nickel and lead. Taken together the retreat was 3%.

Copper continues to take a beating on its recent "avalanche" of inventory and renewed fears that China demand is slowing yet again. Comex copper this morning is trading at $2.9415 per pound. This London Metal Warehouse (LME) Chart tells the story:

Zinc and lead also suffer from recent build in inventory.

Allow me to repeat what I said last week, "Comex copper should return above $3 per pound if 'synchronous' global recovery remains intact. China's currency remains very strong, Europe and India are humming, and rebuilding Houston and Florida [and now Puerto Rico] should give an eventual lift to our own GDP. Inventories will adjust with time. We may have to wait until next year to see a second sustained rally in the red stuff." Barring a nuclear explosion in the Pacific, I still believe this to be true.

And, like the chorus of a tiresome song,  "LME Moly Oxide remains on snooze alarm at $7.26 per pound. This is disappointingly short of $8 after climbing to $7.94 for much of May. Since moly oxide is primarily a byproduct of copper mining, the copper glut is not helping this situation." 

General Moly (GMO) shares have pulled back to $0.43 per share from the $0.46-level established after an upgrade to "buy" earlier this month from Zack's Investment Research, Inc. 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

My vote is up. Target gold price $1,310 per ounce. Target Silver price $17.2 per ounce.

Gold below $1,300.

The lustrous metal is on track to take notable weekly losses against a broad array of assets: major currencies euro & yen, domestic stocks, broader commodity index (Bloomberg BCOM) and Dr. Copper. However, I believe much of this is an overreaction to the Federal Reserve's comments this week that kicked off the great unwind of their 4.2 trillion balance sheet and considerably increased the chances for a rate hike in December.

The exchange of threats between the U.S. and North Korea peaking on a threat for the latter to explode a massive H-bomb over the Pacific have brought new shine to gold this morning. This coupled with global banking policies that remain expansionary and the uncertain economic impact that hurricane devastation will have near term on the U.S. economy, mitigate some of the reaction to Fed Chair Yellen's comments.

I believe, a move up to at least the $1,310-level is in the cards for next week, maybe even higher. It is notable that even with recent pullbacks:1) gold is out pacing the record-setting S&P 500 by nearly 1% this year, 2) it's gains against the yen continue a trend higher since the U.S. election and, 3) with inventories crushing copper prices, gold value compared to the red metal is again elevated.

Silver should move above the $17 per ounce-level to $17.2.

Take heart. Gold is still in bull mode for the year! 

Additional Note:

The fate of the Chinese yuan remains a key tell for gold and copper - a material drop in valuation could boost gold and depress copper prices. The yuan has stabilized below 7 USD/CNY for 2017 and has strengthened recently. This morning, the yuan is trading weaker than last week at 6.5895 USD/CNY, 2.4%  above a low (i.e. a stronger level) for the year of 6.4345. Yuan volatility is now in the ballpark of major currency levels (1-month volatility* 0.72%).

Have a great weekend!

* by comparison the euro & yen 1-month volatilites are  0.44% & 1.15% respectively; Comex gold 1-month volatility is 1.37%.

Weekly Summary  for September 22, 2017 AM  (something new!)

(click on table for larger size)

My latest column in Kitco News, Montreal:

The Gundlach Indicator R.I.P. - Gold, Copper & Interest Rates (Kitco News, August 23, 2017)

McEwen Mining (MUX) $2.45 per share

Gold Bar Project on Track, McEwen Rocks; Gold Bounce Next Week? (Eureka Miner, 03/03/2017)

McEwen Mining & Gold Bar Thumbs Up for 2017! (Eureka Miner, 12/30/16) 

General Moly (GMO) $0.461 per share; Moly oxide (LME) $7.26 per pound

General Moly and its Largest Shareholder, AMER, Strengthen Strategic Partnership (Press Release, August 8, 2017)

Mt. Hope Project's Supplemental EIS Published in Federal Register, Moving Project Towards ROD (Press Release, July 20, 2017)

Marcum Microcap Conference  (Press Release, 6/16/2017)

What's Up with General Moly (GMO)? EM Talks to CEO Bruce Hansen (Eureka Miner, 1/27/17)

Gold Price Outlook: Second-Half 2017 (Revised)

Gold started the year nicely and should remain in my latest revised range of $1,200 to $1,400 per ounce*. Average gold price for 2017 is now expected to print above $1,300 per ounce with a chance to see $1,400 given an adverse outcome for President Trump's agenda, the initial financial impact of super storms Harvey, Irma and Maria, or geopolitical shocks (e.g., North Korea, Syria).

Gold has gained ground on the embattled euro and yen. Post-election, gold in euro and yen terms is up and safely above 2013 lows (chart below). It was worrisome that gold in euro terms broke below uptrend support March 9 and then again after French elections (i.e. defeat of Le Pen), and headed lower on the prospects of the ECB taking a more hawkish stance on monetary policy. It  had a nice rally following President Trump's "fire and fury" comments with an established trend higher. It is presently testing that trend line as shown in the chart.

Gold in yen has mostly trended higher since the U.S. election.

An important gold ratio to watch is gold-to-S&P500 or AUSP (see "Chart to Watch" below).

Gold ratios relative to copper and oil are stabilizing near historically less extreme levels which proves a healthy sign. Gold valuations relative to copper are elevated and recovering from a recent descent lower.

Political and geo-political events together with concerns about the timing and efficacy of the new administration's policies have restored glitter to gold in 2017. A fall below $1,230 is very bearish; above $1,300, bullish; above $1.362, very bullish.

Gold below $1,285 per ounce-level is a tempting "buy."

(please do your own research, markets can turn on you faster than a feral cat!)

* My pre-election October range for gold price was $1,240 to $1,320 per ounce, Winter 2016 Edition of the Mining Quarterly:

 Storms Never Last: Positive News for Gold, Oil & Copper

My commentary in the Spring 2017 Mining Quarterly reaffirms an average price above $1,200 per ounce with a potential run at $1,400:

Commentary: Gold ain't just whistling Dixie; The U.S. dollar has peaked and commodities have bottomed – a bullish case for gold in 2017

Click on the image for a larger size:

Gold in euro & yen terms with good margin above 2013 lows

Chart to Watch

Here's a chart to watch for 2017. 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. It bottomed again December 20, 2016 trended higher but then bearishly bottomed yet again July 7, 2017 (0.4989). We must stay above the December low (0.4973)! Currently this AM the AUSP is 0.5193, falling back to the center of the range after a bullish breakout from the July low. Gold gains still, however, lead the S&P 500 gains for the year by a small margin.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.