Eureka, Nevada
Friday, May 04, 2018 AM
Latest Mining Quarterly! (Checkout story on McEwen Mining's Gold Bar Project)
McEwen Mining Reports Q1 2018 Production Results (Press release, 4/16/2018)
Next Week: Target gold price $1,300 per ounce. Target Silver price $16.3 per ounce.
Morning Miners!
Let's start out with a positive - this morning's labor report showed the headline unemployment rate falling to an 18-year low at 3.9%. Economist's surveyed were optimistic but expected no lower than 4%.
Of course, there are always two sides to the employment coin. The total nonfarm jobs added in April was only 164,000 while the same experts expected a more robust 195,000. The 12-month average is 191,000.
What's up? Aside from some weather-related effects last month, it is becoming harder and harder to add jobs as the U.S. approaches something economists call "full employment." That limit doesn't mean everyone has a job but does define a floor for the employment rate. In other words, the labor market is getting a lot tighter for those willing to work. The debate - are we nearing the end of a very long economic expansion or just catching a gear to something even better?
The miss on added jobs wobbled markets strengthening the U.S. dollar to a new high for 2018 (U.S.dollar index at 92.85 as I write this report, a level not seen since late-December). Comex gold dropped to around $1,310 per ounce after a quick trip to $1,316 and dip to $1,309 following the release.
Additionally, average hourly earnings ticked up only 0.1% to $26.84 per hour compared to an expected 0.3% increase. This is an important inflation indicator suggesting that inflation forces may be taming down (see next topic). On a yearly basis, the data implies a 2.6% wage increase on average.
In the Kitco Weekly Gold Survey, many see gold recovering next week. I'm not as sure but do believe $1,300 per ounce is becoming a new bottom for gold price in this environment. Kitco News carried my thoughts:
Richard Baker, editor of the Eureka Miner Report, looks for gold to test the bottom end of its trading range.
“Barring a political/geopolitical shock, it is unlikely that the yellow metal will sustain rally against a rising U.S. dollar, which made a new high for the year after the weaker-than-expected nonfarm payroll report this morning,” he said.
Baker later added: “On a positive, it appears the march of higher U.S. interest and inflation rates has stalled given comments by the Federal Reserve on inflation and an economy that added fewer jobs than expected. Rising U.S. deficits will establish a floor for gold prices, and it is likely that prices will stay in a range above $1,300 per ounce.”
For a fuller account please see my input to the Kitco survey below.
Inflation Watch
Inflation expectations made a new 2018 high April 23rd above a new trend line of higher lows (blue dotted line, click on chart for larger size). However, it appears inflation expectations are leveling off for now.
10-year Inflation Expectations
Note: In the above chart inflation expectations peaked at 2.14% February 2 but were surpassed April 23 at 2.18%. They were just slightly lower Wednesday at 2.17% (note old trend line, faded blue).
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!
Eureka, Nevada
Scorecard
Here's our scorecard on where we stand.
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 $3.0675 per pound ($6,763 per tonne), at 8.0% below December's high. Improving global growth has kept the red metal above the key $3 per pound. Trade war fears dipped the red metal below this mark but copper is now back above $3. Recent weakness must be watched!
Copper futures remain 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. Encouragingly, the Q1 result is a better-than-expected 6.8% although industrial production fell to 6.0%. Watch this one too, pardner.
Recent U.S. import tariff threats on steel, aluminum and other Chinese exports cloud the outlook for metals. Sanctions on Russian aluminum producer Rusal have spiked aluminum prices to 7-year highs (whose output represents 6% of global supply) but have fallen since with softening of U.S. posit.
First round U.S./China trade talks have concluded with no major issues resolved.
Total copper stored in LME and Nymex warehouses is now lower at 0.576 million tonnes.
LME inventories continue to fall:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME but moving up (324,225 versus 251,511 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 $1,310 per ounce. Target silver price $16.4 per ounce.
Comex gold will retest the May Day low of $1,302.3 next week. Barring a political/geopolitical shock, it is unlikely that the yellow metal will sustain rally against a rising U.S. dollar which made a new high for the year after the weaker-than-expected nonfarm payroll report this morning.
Falling more than 1% in dollar value, gold lost value to key commodities, domestic equities and the Japanese yen this week [CORRECTION: gold actually did eek out a gain on the embattled S&P 500, see Weekly Summary Chart]. It did outpace a weakened euro but overall not much shine from the lustrous one.
On a positive, it appears the march of higher U.S. interest and inflation rates has stalled given comments by the Federal Reserve on inflation and an economy that added fewer jobs than expected.
Rising U.S. deficits will establish a floor for gold prices and it is likely that prices will stay in a range above $1,300 per ounce.
My target for next week is the bottom of that range with silver following gold lower to $16.3 per ounce.[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. There has been talk from China that currency devaluation may be used as a tool in a U.S./China trade war, just talk for now. Something to watch: the yuan has been weakening since mid-April.
The yuan stabilized below 7 USD/CNY for 2017 and had been trending steadily stronger in the new year. The yuan is weaker than last week at 6.3658 USD/CNY and putting some daylight above the March 26th low (i.e. even stronger level) of 6.2342. A low 1-month yuan volatility of 0.50% is lower now than major currency levels - something else to watch (1-month volatilities of euro, yen and gold*).
* the euro & yen 1-month volatilites are an elevated 1.21% & 0.99% respectively; Comex gold 1-month volatility is 1.26%.
Weekly Summary for May 04, 2018 AM
Weekly Summary for May 04, 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. Recent data suggests the floor may be rising to the $1,300-level. Stay tuned, revised outlook presently in the oven!
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). Geo-political tensions in the Middle-East have also re-surfaced.
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 130.06 yen per euro as the gold euro/yen spread resumes its rise (above chart).
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 0.4987, bearishly trending below the key 0.5-level.
Cheers,
Colonel Possum & Mariana
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