Gold $1,325, Jobs Report "Not Good, Not Bad"

Roberts Mountain

Eureka, Nevada

Please read the latest Mining Quarterly!

Friday, January 05, 2018 AM

Morning Miners,

This morning's jobs report for December was weaker-than-expected with 148,000 jobs added compared to an expectation of 180,000. Headline unemployment remained unchanged at 4.1%, a 17-year low. CNBC Business News commentator Rick Santelli called the report, "Not good, not bad."

Revisions to previous months were mixed with 252,000 jobs added in  November from an earlier report of 228,000. October's number dropped to 221,000 from an earlier 244,000.

In terms of gold, the report reduced anxiety about a hawkish Federal Reserve that may be more aggressive in raising rates to tame an overheated economy in 2018. Theses numbers won't "spook the Fed" intoned another commentator. So far, the pot is steaming but not boiling over. Higher interest rates in a low inflation environment are a serious headwind for gold price (for more on this please see today's input to Kitco News below).

The 10-year Treasury benchmark yield popped up to 2.48% after the report. The important link between the 10-year and gold and copper prices is explained in my latest Kitco column:

The Gundlach Indicator Restored - Gold, Copper and Interest Rates (December 27, 2017, Kitco News)

Scorecard 

Here's our scorecard on where we stood for the last-half of 2017:

Intraday highs on the Comex futures exchange: 

Gold $1,362.4 per ounce September 8, 2017 (December 2018 contract)

Silver $18.290 per ounce September 8, 2017 (December 2018 contract)

Copper $3.3220 per pound ($7,186 per tonne) December 28, 2017 (March 2018 contract)

Comex copper is presently trading at $3.2315 per pound, only 2.7% below December's new high. Improving global growth has kept the red metal above the key $3 per pound level with an added boost from passage of Tax Reform and expectations for U.S. infrastructure spending. All eyes remain on China to see how growth prospects shape up. LME inventories are leveling off as we start a new year:

It is instructive to keep our eyes on the Comex inventories which now exceed the LME after moving higher in late-2017 (211,237 versus 200,225 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 in May, 2107." 

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 $1,310 per ounce. Target Silver price $17.1 per ounce.

The recent concern that an overheated economy may result in more aggressive rate hikes for 2018 seems to have abated this morning with a weaker-than-expected U.S. jobs report - the Federal Reserve has a little more time to breath. This is supportive of gold price.

However, the weaker U.S. dollar that helped propel the yellow metal above the $1,300-level may be nearing a bottom. Although average hourly wage growth bumped a respectable 0.3%, the year-over-year number of 2.5% demonstrates a non-accelerating wage growth. This suggests inflation is still in check. Going forward, a strengthening U.S. dollar in a low inflation environment is a headwind for higher gold prices.

Taken all together, I believe the strong gold rally that began mid-December is running out of steam. It is likely prices will retreat some next week; my target is $1,310 per ounce and silver at $17.1 per ounce.

On a weekly basis, gold posted solid gains relative to copper, the broader Bloomberg Commodity Index (BCOM) and major currencies euro and Japanese yen. Gold is slipping in value, albeit not dramatically, to surging global equities. Relative to the record-breaking S&P 500, gold retreated only 1.5% [see last graph below, Chart to Watch].

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 stabilized below 7 USD/CNY for 2017 and has been generally growing stronger. The yuan is stronger than last week at 6.4867 USD/CNY and is now only 0.8% above its 2017 low (i.e. its strongest level) of 6.4345. A 1-month yuan volatility of 0.78% is in the ballpark of major currency levels - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

* the euro & yen 1-month volatilites are  0.92% & 0.35% respectively; Comex gold 1-month volatility is a slightly elevated 2.11%.

Weekly Summary  for January 05, 2017 AM 

(click on table for larger size)

Yearly Summary for 2017

(click on table for larger size)

Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a  respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.

Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!

Gold Price Outlook for 2018:

My revised gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).

Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. I believe this will secure a price floor in the $1,200 to $1,250 range with highs challenging but not exceeding the September Comex high of $1,366 per ounce.

2018 will prove a less bullish period for gold than this year unless interest rates are contained near present levels and copper prices fall - a less likely scenario given U.S. growth and synchronous global growth expectations. Inflation will be another key factor to monitor.

Here's a good beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended\ 2017 n the middle of that range with prices just above $1,300 - a fair starting point. 

Which side of this bet you take depends on whether you have a half-empty or half-full view on interest rate direction and economic prospects, both global and domestic.

Two important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below).

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 136.26 yen per euro, trending higher since late-October 2017. 

Chart to Watch

Here's a chart to watch for 2018. 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 more recently December, 12, 2017 (0.4661). Currently this AM the AUSP is 0.4824 - still bearishly below the key 0.5-level but with good margin from the mid-December low.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.