Gold $1,278 on Weaker-than-Expected Jobs Report; What Drives Gold price Now?

Ruby Hill (2014)
Eureka, Nevada

Friday, November 3, 2017 AM

Morning Miners,

Ah, those crazy numbers!

This morning's monthly jobs report from the Labor Department surprised to the downside. The nonfarm payrolls showed an advance of 261,000 jobs compared to expectations of 312,000. By a separate survey, headline unemployment dropped to 4.1% with a shrinking work force. How should you read this?

The first thing to remember is the impact of major hurricanes - the Bureau of Labor statisticians have never sharpened their pencils on the impact of two debilitating hurricanes (Puerto Rico is not in the survey, otherwise it would be three). Last month jobs were down 33,000 but that was revised to up 18,000 with this morning's report (still low but now positive).

Consensus called for a big positive correction of 300,000 or more, some even forecasting 400,000. That is why the reported number was deemed low with talking heads saying things like "weak number" and "lower than anyone expected."

Here's how the ole Colonel sees it. No one really knows how to figure in storm impacts of this magnitude so it is best to look at averages to see the big picture. The 3-month average is 162,000. 261,000 is a lot higher than the average so we're in pretty good shape. Another positive is a decrease in the broader U6 unemployment which includes everyone with a heartbeat that has even vaguely thought about getting off the couch to find work. The U6 number is now 7.9% - pretty darn low remembering it was running above 17% during the bad times.

Participation rate unfortunately ticked down 0.4% to 62.7% which is a measure of folks that are earnestly looking for work. Another disappointment is that hourly wages remained flat - we want this to go up! Again, there may be some stormy stuff in these calculations.

Bottom line? I think the U.S. Federal Reserve is more upbeat about the economy then earlier this year and is on course to bump rates in December. Janet Yellen will be replaced by Jerome Powell next year but most expect a continuity of monetary policy. The U.S. is tightening while most major central banks are still in loosey-goosey mode as I discuss in my input to Kitco News (see below). This divergence in policies supports gold price with a floor now around $1,250 per ounce. As long as someone out there continues to print money, gold is in good shape.

The high side is driven by political and geopolitical uncertainties and shocks. Although hard to predict, an upset or two could very well set gold on a course above $1,300 and perhaps touch $1,400 next year. Lacking such drama, the yellow metal will behave as a currency driven by global monetary policy. It had a good week gaining on both the euro and Japanese yen (discussion and charts below).

For more about gold, please read my input below to the Kitco News Weekly Gold Survey.

Here's our scorecard on where we stand for the last-half of the year:

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 $3.2595 per pound ($7,186 per tonne) October 16, 2017 

Comex copper is presently trading at a $3.1430 per pound, below October's high but up 1.3% for the week. Improving global growth has kept the red metal climbing but now it faces U.S. dollar strength (it bears repeating that the OECD now predicts 45 economies will grow this year and the IMF has stepped up global 2018 GDP from 3.6% to 3.8%). All eyes are on China to see how growth prospects shape up now that their upbeat 5-yearly Congress has concluded. Copper prices are less sensitive to supply side excess as LME inventories continue to decline:

It is instructive to keep our eyes on the Comex inventories which, albiet lower in total, have leveled off:

And, again the chorus of our very tiresome molybdenum 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." 

General Moly (GMO) has fallen to the $0.28-level per share. The company received their AMER Tranche #2 funding on Monday, October 16. 

My Input to Kitco News 

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 $1,285 per ounce. Target Silver price $17.2 per ounce.

A weaker-than-expected U.S. jobs report has backed the 10-year Treasury further away from 2.4% and the U.S. dollar index (.DXY) from 95. Both of these levels were identified as key to maintaining an uptrend in interest rates and stronger U.S. dollar; retreat from these levels is bullish gold, at least for the time being.

Gold price was steady around $1,278 per ounce following the labor report and its price floor supported by recent announcements from Central Banks. With the selection of Jerome Powell as the new Fed Chair, the U.S. is expected to continue tightening albeit at a gradual pace. The Bank of Japan will continue its policy of accommodation while Europe takes a "lower for longer" approach to quantitative easing. The Bank of England broke ranks by its first rate rise in 10 years but the net effect is a general divergence of U.S. monetary policy from most other major central banks. This establishes a solid floor for gold which, I believe, is $1,250 per ounce.

President Trump's travel to Asia could, at least initially, stir the geopolitical pot and provide gold another run at the $1,285-level next week - perhaps higher (e.g., provocative action by North Korea).

Although gold lost ground to key commodities and the broader Bloomberg commodity index (BCOM), it showed strength compared to the euro and Japanese yen. Gold has re-established uptrends in both currencies - another bullish indication [see Weekly Summary Table & currency chart below].

Silver should follow gold higher next week to $17.2 per ounce.

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 generally grown stronger. The yuan is stronger than last week at 6.6240 USD/CNY and now 2.9% above its low (i.e. a stronger level) for the year of 6.4345. A 1-month yuan volatility of 0.36% is in the ballpark of major currency levels - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

Have a great weekend!

* the euro & yen 1-month volatilites are  0.67% & 0.69% respectively; Comex gold 1-month volatility is 0.81%.

Weekly Summary  for November 3, 2017 AM 

(click on table for larger size)

My latest column in Mining Quarterly (as reprinted in the Elko Daily Free Press):

A Tectonic Shift in Markets (Elko Daily Free Press, September 12,2017)

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) $1.93 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) $0.28 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: Fourth Quarter 2017 (Revised)

Gold started the year nicely and should remain in my latest revised range of $1,250 to $1,400 per ounce*. Average gold price for 2017 is expected to print above $1,250 per ounce with a chance to see $1,400 given an adverse outcome for President Trump's tax reform plan or geopolitical shocks (e.g., North Korea, Iran, 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 a trend higher since early-July. The ECB's "lower for longer" approach to quantitative easing has returned some mojo to the gold-in-euro uptrend.

Gold in yen has mostly trended higher since the U.S. election. The Bank of Japan announcement that their accommodative monetary policy is unchanged supports this uptrend.

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 at historically less extreme levels which proves a healthy sign. However, gold valuations relative to copper are again in decline posting a new low for the year of 401 pounds per ounce on October 18th and again on the 25th. Falling below 400 is bearish for gold.

Political and geopolitical 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 $1,260 is bearish; below $1,230, very bearish. A rise above $1,300 is bullish; above $1,362, very bullish.

(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

Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 132.69 yen per euro. 

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 again July 7, 2017 (0.4989) and October 20, 2017 (0.4972). Currently this AM the AUSP is 0.4957...a modestly positive move from last week's low.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.