Gold $1,277, Pops to $1,291 on Flynn; Tax Reform Passage Likely

Gold Country
Eureka, Nevada

Friday, December 01, 2017 AM

Morning Miners,

What a text book morning for gold!

For the most part, gold has been roughed up this week on improving expectations for passage of the U.S. Tax Reform bill in some form. As I explain in my input to the Kitco News Weekly Gold Survey (below), passage will be "net bearish for gold given the thesis that lower taxes will spur economic growth, strengthen the U.S. dollar and establish an environment for higher interest rates." When I wrote that opinion Comex gold traded at $1,277 per ounce, down 0.9% for the week. 

Then BAM! 

The newswires report that Michael Flynn pleads guilty to lying to the FBI. Comex gold pops to $1,291 as the U.S. political uncertainty pot gets a new stir:

Michael Flynn pleads guilty to lying to FBI in Mueller probe (NBC News, 12/01/2017)

In the early morning, gold behaved as a currency reacting to the forces of U.S dollar strength and interest rate expectations. With the Flynn headline, gold switches to safe haven mode. Currently Comex gold has retreated some from its high to trade at $1,287.2 (8:40 a.m. Eureka time). The two bookends of gold's 2017 story - the ebb and flow of currency-like behavior and "run-for-the-exits" price transients. 

I believe there will be some settling in the coming days and that Tax Reform will probably advance to reconciliation. Political and geo-political turmoil support gold; a shot-in-the arm to economic growth provides some headwinds in terms of U.S. dollar and interest rates.

So it goes for the Lustrous One.

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 $3.0800 per pound, below October's high and 2.9% down for the week. Improving global growth has kept the red metal above the key $3 per pound level (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.  Today's Caxin PMI was weaker-than-expected at 50.8 but still expansionary. 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 are on the rise and now exceed the LME (209,143 versus 191,725 tonnes)

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) popped to $0.35 yesterday and is currently trading at $0.31 per share. The company received their AMER Tranche #2 funding on 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 $1,270 per ounce. Target Silver price $16.2 per ounce.

Gold price is very sensitive to the fate of the U.S. Tax Reform bill as evidenced by a more than $30 per ounce swing this week that tracked up-and-down expectations for passage. Although the Senate vote has been delayed until possibly today, it will likely pass in some form; the same is true for the reconciliation phase. This will be net bearish for gold given the thesis that lower taxes will spur economic growth, strengthen the U.S. dollar and establish an environment for higher interest rates. 

This week's better-than-expected U.S. GDP print of 3.3% reinforced the notion of a strengthening economy. A key interest rate to watch is the 10-year Treasury yield: sustained rise above 2.4% is bearish.

The yellow metal has, however, gained more than 2% on falling copper with a slight loss to the broader Bloomberg Commodity Index (BCOM). Mixed results are also true relative to major currencies; gaining value on the yen but falling to against the euro.

Silver should follow gold lower next week to $16.2 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 weaker than last week at 6.6103 USD/CNY and now 2.7% above its low (i.e. a stronger level) for the year of 6.4345. A 1-month yuan volatility of 0.21% 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  0.97% & 0.85% respectively; Comex gold 1-month volatility is 0.66%.

Weekly Summary  for December 01, 2017 AM 

(click on table for larger size)

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 political/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 although that movement up has now faltered (see chart below).

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 yesterday (0.4822). Currently this AM the AUSP is 0.4830...a modest uptick from this week's low but at now bearish levels (AUSP < 0.5).

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.