Gold $1,314; New NEC Director, "I would buy King Dollar and I would sell gold"

Ingersoll-Rand 2-Stage Compressor
Eureka, Nevada


Friday, March 16, 2018 AM

Latest Mining Quarterly! (Checkout story on McEwen Mining's Gold Bar Project)

Interesting tidbit on the old Gibellini (Vanadium) properties: Prophecy Development Corp.

Next Week: Target gold price $1,320 per ounce. Target Silver price $16.5 per ounce.

Morning Miners!

Larry Kudlow, new director for the National Economic Council,  replaced former Goldman Sachs Executive Gary Cohn this week. He becomes the top economic adviser to President Trump. Larry, a former CNBC Business News commentator, opined, "I would buy King Dollar and I would sell gold."

At first take, that seems an ominous call for not only the yellow metal but for any dollarized commodities that have enjoyed a nice bump in 2018 on a declining dollar. Greenback strength has been a feature of global markets since late-2014 but has fallen back this year as major central banks follow the Federal Reserve in slowly dialing back "easy money" policies. Whether this trend can be reversed is not clear, some argue U.S. dollar strength/weakness moves in 6-8 year cycles and we are witnessing the beginning of a weak cycle.

Perhaps, more importantly, Mr. Kudlow has argued against tariffs and may serve as a constructive counter- balance to Peter Navarro, director of the White House National Trade Council. Mr. Navarro has promoted tariffs to re-balance trade relations with China and other countries that have engaged in unfair trade practices. For several weeks, markets have reacted to the potential for a trade war with these partners. For example, China has suggested they may impose tariffs on U.S. coal, agricultural and electronic imports.This could lead to higher consumer prices, domestic inflation and  a slowdown in economic growth. 

This report has maintained that the international dust-up will subside as details and compromises are eventually worked out across borders - Mr. Kudlow may provide some of that moderating influence.

In any case, it is too early to predict how all of this will drive the U.S. dollar and gold price. That was what the markets said this week with little material change in the price of gold or copper, or change in the U.S. Dollar Index.  

Inflation expectations also fell from near 3-1/2 year highs this week which is an encouraging sign (click on chart for larger size):

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14%; on March 14 the number was 2.07%, March 7 was 2.13%..

I discuss more of these relations in my input to the Kitco News Weekly Gold Survey (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!

Double-drum Air Hoist

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 (April 2018 contract)

Silver $18.160 per ounce September 8, 2017 (Continuous chart))

Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)

Comex copper is presently trading at $3.1150 per pound, 6.6% 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 on track 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. The GDP projection for 2018 is 6.5%, down but still fairly robust.

China's industrial output climbed 7.2 percent in the January to February period from a year ago, faster than the 6.2 percent rise in December. That was also above the 6.6 percent increase economists had forecast.

Recent threat of U.S. import tariffs on steel and aluminum as well as  cloud the outlook for metals. Also, indefinite tariffs, investment restrictions and possible visa restrictions on Chinese travelers are now being contemplated by the Trump Administration.

Chinese post-Lunar holiday remain in a grumpy mood with copper futures down year-to-date on the Shanghai Futures Exchange (SHFE).

Copper stored in LME and Nymex warehouses are now 0.53 million tonnes - net copper inventories are declining slightly.

LME inventories built stronger as we started the new year, but are now in decline: 

It is instructive to keep our eyes on the Comex inventories which are behind the LME but still rising (233,462 versus 319,825 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 up. Target gold price $1,320 per ounce. Target Silver price $16.5 per ounce.

With all the drama this week coming from White House turnovers and uncertainty about trade policy, it is instructive to note what didn't change much. Rising U.S. inflation expectations stalled, the CPI report was tame and this morning's report on inflation in the euro zone was slightly weaker-than-expected. The rising benchmark 10-year Treasury yield also retreated from 2.9% territory and the U.S. dollar Index is still meandering around the 90-level. 

Following along, gold price is down for the week but not dramatically. This is even after President's new economic adviser Larry Kudlow opined, "I would buy King Dollar and I would sell gold." I think this wait-and-see sentiment in the markets will persist next week and that gold price will edge back up to the $1,320-level; silver, to $16.5 per ounce.

The G-20 meeting in Argentina next week may be a catalyst for greater volatility for the yellow metal and markets.

Gold gained a bit on the broader Bloomberg Commodity Index this week, remained fairly even with the red metal and lost 1.5% of value to oil. It lost ground relative to the euro (-0.5%) and the Japanese yen (-1.4%). The long uptrend of gold in terms of yen has broken down; gold in euro continues to meander sideways around 1,070ϵ per ounce.

Gold gained +0.3% compared to the the benchmark S&P 500 and is 2.2% 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. The yuan is slightly stronger than last week at 6.3238 USD/CNY and above the February 7th low (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 0.27% 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  0.56% & 0.49% respectively; Comex gold 1-month volatility is a low 0.91%.

Weekly Summary  for March 16, 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 it has been on the rise (see chart above in discussion).

The difference between interest rates and inflation expectations drive gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.

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 widens again 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 130.28 yen per euro as the gold euro/yen spread remains wider than earlier in 2018.

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 0.4646, bearishly below the key 0.5-level.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.