Gold $1,298 on Strong Jobs Report; Headed for Bull Pasture?

Is gold headed for bull pasture?
Eureka, Nevada

Friday, June 01, 2018 AM

Latest Mining Quarterly! 

McEwen Mining Proposed Issue of Notes (Press release, May 25, 2018)

Next Week: Target gold price $1,300 per ounce. Target Silver price $16.4 per ounce.

Morning Miners!

Sometimes it's tough to be one of only two bulls in bull pasture.

The results of the Kitco Weekly Gold Survey just posted: Fourteen market professionals took part in the survey. There were 10 votes, or 71%, calling for gold prices to fall. There were two votes each, or 14%, for gold to rise or else trade sideways. 

A lonely call when the majority of experts think gold is headed for the mineshaft or parked on the sidelines.

Kitco gave my reason for cautious optimism:

Richard Baker, editor of the Eureka Miner Report, was the other bull in this week’s survey. “I believe it likely that gold will again reclaim $1,300 territory as political/geopolitical concerns create more lift than the combined drag of a strong dollar and a re-energized Fed that may raise rates more aggressively on upside jobs numbers,” Baker said.

My complete input to Kitco News is given below. Today's downward pressure on gold prices came from a very strong employment report for May . Other than gold price, this is something to be happy about!

May added 223,000 more jobs and the unemployment rate edged down to 3.8% - an 18-year low. Average hourly earnings also bumped up 0.3% which is a healthy month-to-month number. Bottom line - the U.S. economy is catching a higher gear.

The downside for gold watchers is an anticipation of higher interest rates and even stronger U.S. dollar*. Higher interest rates move investors from gold to interest bearing assets like bonds and a stronger dollar is rough on dollarized commodities across the board. Interest rates rising wouldn't be so bad if inflation was rising too but inflation expectations are now falling (see next chart).

So why should gold prices rise? My companion in bull pasture gave this reason:

Phil Flynn, senior market analyst with at Price Futures Group, looks for gold to rise despite the strong jobs number. “We’ve been pretty range-bound on gold,” he said. “Obviously the strong, blockbuster jobs report put pressure on gold because it increases expectations the Fed will raise rates. But there are still geopolitical concerns around the world.”

Amen brother. 

Let's get through trade war fears, the U.S./North Korea Summit and political problems in Europe before we bail on the tireless safe haven that glitters brightly even under cloudy skies.

* U.S. Dollar Index (.DXY) high 94.50 on 5/29.

Inflation Watch

Inflation expectations made a new 2018 high April 23rd above a  new trend line of higher lows (dark blue dotted line, click on chart for larger size). However, it appears inflation expectations are now in decline.

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%. Tuesday dramatically broke the trend line of higher-lows (dashed blue line) falling to 2.04% edging up to 2.06% Wednesday.

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 Glory
Eureka, Nevada

Scorecard 

Here's a scorecard on where we stand with some of our favorite metals. 

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 $3.0835 per pound ($6,798 per tonne), still lack luster at 7.5% 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!

Total copper stored in LME and Nymex warehouses is lower than last week at 0.515 million tonnes.

LME inventories are lower: 

It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 285,375 versus Nymex 231,364 tonnes):

My Input to Kitco News 

Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey:

Target gold price $1,300 per ounce. Target Silver price $16.4 per ounce.

Sharp market reversals have characterized this week in equities, currencies and interest rates. In surprising contrast, gold remains currency-like with low 1-month volatility (less than 1%). Earlier this shortened week, a sharply rising U.S. dollar was balanced by falling interest rates keeping the lustrous metal in a fairly tight range. Fears of trade wars and Europe troubles protected gold from returning to its May low. 

This morning's strong jobs report may upset that equilibrium with the U.S. dollar and interest rates now moving higher together. However, I believe it likely that gold will again reclaim $1,300 territory as political/geopolitical concerns create more lift than the combined drag of a strong dollar and a re-energized Fed that may raise rates more aggressively on upside jobs numbers. Silver will follow gold higher but with less gusto to the $16.4-level. [see Weekly Summary Chart]

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 6.4188 USD/CNY, and putting even more daylight above the March 26th low (i.e. stronger level) of 6.2342. A low 1-month yuan volatility of 0.39% is lower than major currency levels - something else to watch compared to 1-month volatilities of euro, yen and gold.*

* the euro & yen 1-month volatilites are 1.00% & 0.69% respectively; Comex gold 1-month volatility is 0.88%

Weekly Summary  for June 01, 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 Revised Outlook for 2018:

My 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. My revised forecast is a floor price of  $1,285 with highs challenging but not exceeding $1,380 per ounce [5/21/2018 Comex gold tested $1,286.8 on an intraday basis, August contract]

2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S.  Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion). 

The difference between interest rates and inflation expectations drives 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 the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in 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. Now that I've risen the floor to $1,285, it looks like the half-full folks may have something to celebrate in 2018.

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)

Note the resumed divergence of the euro-yen spread in the second chart appears to be stalling..

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 128.02 yen per euro as the gold euro/yen spread reverses lower (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 0.4759 bearishly below the key 0.5-level and heading lower. There is only a (very) weak trend of higher-lows from December 2017.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.