Gold $1,331 - Trouble Ahead for the Lustrous One? Lotsa Copper!

Old School Panning for Gold

Friday, February 23, 2018 AM

Morning Miners!

The Chinese Year of the Dog is underway as bleary-eyed traders return to their desks after a long Lunar Holiday. In Shanghai, no clear direction on metals yet - the red metal is in the green, gold is flat and most have crawled back in bed (it just turned Saturday there). Oh, remember that in China green is down and red is up; copper is off about 0.5%. No big shakes, it will take the next few weeks to get a good read on both metals from the Asian perspective.

For gold,  the larger driver will be the dog race between inflation expectations and rising interest rates. As I note in my input to the Weekly Kitco Gold Survey, "If the former lags the latter, gold will face serious headwinds in the months ahead. Last week the yellow metal gaped higher on a hot CPI print. This week it reversed on increasing fears that the Federal Reserve will take a hawkish stance on the frequency of rate hikes. The 10-year TIPS real yield is now +0.8%; moving more positive is bearish gold." 

The benchmark 10-year U.S. Treasury is above 4-year highs this week at 2.9+%. The next read on inflation will be the average hourly earnings reported next Friday by the U.S. Labor Department. Could be an exciting week for gold, I'm betting we'll see $1,320 per ounce before any upside. Please read the my input below for further details.

A lot of futures interest in copper this year with warehouses in London and the U.S. bulging with over 0.5 million tonnes of the red metal (see below).

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. My latest Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Several of the charts in this column are updated below.

Have a fun weekend!

Old School Mining

Windfall Mine, Eureka, Nevada

Scorecard 

Here's our scorecard on where we stand for the last six months:

Intraday highs on the Comex futures exchange: 

Gold $1,370.5 per ounce January 25, 2018 (February 2018 contract)

Silver $18.360 per ounce September 8, 2017 (March 2018 contract)

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

Comex copper is presently trading at $3.2015 per pound, 3.6% below December's 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. China growth prospects appear to be firming up with a better-than-expected Q4 GDP of 6.8%. This results in a GDP 6.9% for 2017 compared to 6.7% for 2016.

Chinese returning from their Lunar holiday should provide new clues on price direction in the coming weeks.

Copper stored in LME and Nymex warehouses now exceeds 0.5 million tonnes - that's a lot of red metal, pardner!

LME inventories are building stronger as we start a new year: 

It is instructive to keep our eyes on the Comex inventories which are now behind the LME (228,911 versus 337,175 tonnes):

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 down. Target gold price $1,320 per ounce. Target Silver price $16.4 per ounce.

After Tuesday's sharp price reversal down, gold is likely to close the week scoring losses across a broad class of assets including equities, commodities and major currencies. 

On a positive note, gold has maintained low currency-like volatility, absorbing losses but not dipping to the February low ($1,309). It is likely the yellow metal will be down next week but not below the $1,320-level. Silver will follow gold lower to $16.4 per ounce.

The Chinese Year of the Dog is underway and 2018 will be a dog race between inflation expectations and rising interest rates. If the former lags the latter, gold will face serious headwinds in the months ahead. Last week the yellow metal gaped higher on a hot CPI print. This week it reversed on increasing fears that the Federal Reserve will take a hawkish stance on the frequency of rate hikes. The 10-year TIPS real yield is now +0.8%; moving more positive is bearish gold.

Gold is losing value to global commodities oil and copper. With a weekly price drop of 1.8%, gold has lost 3.5% to WTI and 0.4% to copper. The lustrous metal has slid more than 2% against the broader Bloomberg Commodity Index. Gold lost nearly 1% in terms of euro and a notable 1.6% to the Japanese yen. A sizable gain accumulated during the violent stock market correction is slowly eroding but still over 5% above its mid-December low (Comex gold-to-S&P500 ratio) [see Summary Chart & 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 trending steadily stronger in the new year. On a week shortened by Lunar Holidays, the yuan is stronger than last week at 6.3339 USD/CNY but above the February 7th low (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 0.42% is in the ballpark of major currency levels (but skewed given the holidays) - a healthy sign for the Chinese currency (1-month volatilities of euro, yen and gold*).

* the euro & yen 1-month volatilites are  0.54% & 1.03% respectively; Comex gold 1-month volatility is a very calm 0.86% (expect this to rise).

Weekly Summary  for February 23, 2018 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 $1,380 per ounce.

2018 will prove a less bullish period for gold than last year unless interest rates return to 2017 levels and copper prices fall - a less likely scenario given the recent rise of the 10-year Treasury together with U.S. growth and synchronous global growth expectations. Inflation will be another key factor to monitor, there are growing signs it is on the rise (i.e. latest CPI report).

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.

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). An explanation of the charts below is given in my latest Kitco column:

The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)

Click on the image for a larger size:

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

Gold euro/yen spread contracts in 2018

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 131.35 yen per euro and trending higher.

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 (0.4973) trended higher but then bearishly bottomed again in July, 2017 and more recently December, 12, 2017 (0.4661). Currently this AM the AUSP is 0.4893, down but close to the key 0.5-level.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.