Gold $1,338 on Weaker-Than-Expected Jobs, Tariff Threats

Miners on Cage, Catlin Shaft
Eureka, Nevada

Friday, April 06, 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 $1,350 per ounce. Target Silver price $16.6 per ounce.

Morning Miners!

A market news avalanche before 6:00 a.m this morning! Let's see if we can unpack it.

The monthly Labor Department jobs report came out at 5:30 a.m. showing nonfarm payrolls for March were 103,000 jobs versus 178,000 expected. Headline unemployment remains at 4.1%.

Although this is weaker-than-expected, the February report was unexpectedly high and March had some weather impacts. All-in-all, average jobs added on a monthly basis is 202,000 which is good. In the words of a CNBC News guest, "a steady-as-you-go economy." This is important because an overheated economy would move the Federal Reserve to a more hawkish pace for rate hikes. Comex gold popped $10 per ounce on the news to currently trade at $1,339.2 per ounce.

Before this report, President Trump's threat of $100 billion new tariffs for China rattled global markets overnight and increased the chances for a major trade war. Shortly after the report, the Treasury Department announced new Russia sanctions which included 7 oligarchs 12 companies and 17 senior Russian officials. One oligarch singled out was the devious aluminum magnate Oleg Deripaska tied to the Russian mob and implicated in the Paul Manafort case. Things are heating up, pardner.

Importantly, gold reacted more to the interest rate implications of the jobs report than new tariff proposals and Russian sanctions. I explain why in my input to the Kitco News Weekly Gold Survey below.

One other key data point from the Labor Department was average hourly wages which ticked up more-than-expected at 0.3% . This may indicate that inflation is again picking up after peaking earlier this year - another potentially bullish outcome for the yellow metal (see Inflation Watch below).

Finally, although rhetoric is heating up on both sides of the U.S./China trade dispute there are roughly two months of negotiation ahead before any real tariffs are imposed. The ole Colonel is betting that the bark of both dogs on either side of the fence is greater than the their bite - let's hope so.

Inflation Watch

Inflation expectations fell from February's high and broke trend (blue dotted line, click on chart for larger size). However, today's labor report may reverse expectations to the upside:

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2; Wednesday was 2.09%.

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!

Livery Stable by Courthouse (Croesus Mine support)

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 $3.0490 per pound ($6,722 per tonne), 8.5% 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. Trade war fears dipped the red metal below this mark but copper is now back above $3.

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

China growth resulted 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.

Recent U.S. import tariff threats on steel, aluminum and other Chinese exports 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.

Copper stored in LME and Nymex warehouses are now 0.61 million tonnes - net copper inventories are up compared to March.

LME inventories up: 

It is instructive to keep our eyes on the Comex inventories which are behind the LME and are now moving sideways (378,075 versus 232,038 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 $1,350 per ounce. Target silver price $16.6 per ounce.

One of the most striking features of 2018 is the return of high volatility to equity markets. The flip-side is the marked low volatility of gold and major currencies. Yes, gold moves up on safe haven plays such as the threat of trade wars or this morning's weaker-than-expected U.S. labor report but the moves are not dramatic.

By contrast, remember the galloping gold volatility of 2011? It appears gold and currencies are more closely tracking the slowly evolving change in global monetary policy while equities are responding to the higher frequency noise of Presidential tweet storms. In that environment, the correlations of gold and stocks are often erratic and atypical. Although the yellow metal exhibits low currency-like volatility it has been bullishly outpacing the euro and Japanese yen since mid-March.

I think this trend will continue pushing prices closer to $1,350 per ounce next week with silver following to $16.50. Political/geo-political shocks could send prices towards the March high ($1,362) with a solid floor at the March low ($1,309).

In value, gold advanced more than 1% compared to the euro and yen this week. It moved ahead of the broader Bloomberg Commodity Index (BCOM) by 0.5% while stayed roughly even with recovering copper prices. [see Weekly Summary and charts below]

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 weaker than last week at 6.3040 USD/CNY and above the February 7th low (i.e. even stronger level) of 6.2540. A 1-month yuan volatility of 0.32% 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  0.42% & 0.60% respectively; Comex gold 1-month volatility is 0.93%.

Weekly Summary  for April 06, 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, 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

Note upside trend of higher lows for gold in U.S. dollars for 2018 (dotted blue line).

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 131.55 yen per euro as the gold euro/yen spread begins to rise again (above chart).

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 0.5051, bullishly above the key 0.5-level.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.