Gold $1,318 on "Blockbuster" Jobs Report; Asia, Europe Trade War Looms

Austin, Nevada

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

Friday, March 09, 2018 AM

Latest Mining Quarterly!

Morning Miners!

Good news on the jobs front! CNBC Business News called the U.S. Labor Department report a "blockbuster." A stunning 313,000 jobs were added in February (205,000 expected) with upward revisions to both the January and December numbers. Unemployment is steady at a low 4.1%.

One of the most closely watched numbers is hourly wage growth because of its historical relation to inflation. The February data showed an uptick of only 0.1% for a total growth of 2.6% year-over-year. This suggests only tame inflation going forward with a potentially booming economy. This is at odds with inflation expectations returned to near 3-1/2 year highs this week with acceleration from late-November as shown in this chart (click for larger size):

10-year Inflation Expectations

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

Today's jobs report may blunt this advance. I discuss the potential impact on gold price in my input to the Kitco News Weekly Gold report (see below). Allen Sykora of Kitco News quoted my thoughts in part:

Richard Baker, editor of the Eureka Miner Report, was one of two voters who look for higher gold prices next week. “Today's robust job numbers imply the economy may not only be on track but heating up,” Baker said. “This may spur the U.S. Federal Reserve to be more hawkish with interest rate hikes. 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. “It is too early to tell which way the headlines will flow. Next week, it is likely that Comex gold will either challenge its March high ($1,342.0) or test February's low ($1,303.6). I believe the answer is up slightly from this morning's trading….”

The dark cloud that casts a shadow on the employment numbers is the potential for a trade war. Following yesterday's tariff announcement by President Trump, Asia and Europe threaten retaliation (Canada and Mexico were thankfully excluded from this initial round of tariffs). If a battle ensues leading to higher consumer prices, domestic inflation will catch a gear and economic growth could slow. China has suggested they may impose tariffs on U.S. coal, agricultural and electronic imports. Ouch.

Hopefully some of this international dust-up will subside as details and compromises are eventually worked out across borders.

Interest rates and inflation numbers going forward are also 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!

Austin, 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 $3.1135 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 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. The GDP projection for 2018 is 6.5%, down but still fairly robust.

[03/14/2018 UPDATE] 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 [03/14/2018 UPDATE].

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 0.55 million tonnes - net copper inventories are leveling off.

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 rising (232,568 versus 316,375 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.

Not surprisingly, where gold goes from here is highly dependent on the future trajectory of U.S. inflation and interest rates. Inflation expectations (as measured by the TIPs break-even rate) are at 3-1/2 year highs and have accelerated since late November but today's "blockbuster" jobs report may blunt that ascent. 

Better-than-expected jobs added with lower-than-expected wage growth suggests tame inflation ahead. However, Asia and Europe threatening trade retaliation in the wake of yesterday's tariff announcement could spur domestic inflation with higher consumer prices. Today's robust job numbers imply the economy may not only be on track but heating up

This may spur the U.S. Federal Reserve to be more hawkish with interest rate hikes. The difference between interest rates and inflation expectations drive gold price; if the former leads the later, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially be very bullish for gold. It is too early to tell which way the headlines will flow.

Next week, it is likely that Comex gold will either challenge its March high ($1,342.0) or test February's low ($1,303.6). I believe the answer is up slightly from this morning's trading to $1,320 per ounce with silver following at $16.50 per ounce.

Gold followed the broader Bloomberg Commodity Index lower this week, staying fairly even with the red metal and gaining slightly on oil. It lost ground relative to the euro (-0.3%) but made a sizable gain on the Japanese yen (+0.7%). 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 slipped nearly 3% compared to the the benchmark S&P 500 but is still 2.5% 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. The yuan is stronger than last week at 6.3314 USD/CNY and above the February 7th low (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 0.29% is in the ballpark of major currency levels (but still somewhat 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  0.60% & 79% respectively; Comex gold 1-month volatility is a low 0.96%.

Weekly Summary  for March 09, 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 (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 131.47 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 0.4781, bearishly falling away from the key 0.5-level.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.