Gold $1,303 Rides on Geo-Concerns; Copper on Fire - Whoa!

Some things remain the same
Eureka, Nevada

Friday, June 08, 2018 AM

Latest Mining Quarterly! 

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

Target Gold Price: 1,310 per ounce Target Silver Price: $16.9 per ounce.

Morning Miners!

Gold is back in $1,300 territory and looks secure going into the weekend on worries about the upcoming G7 and U.S./North.Korea Summits together with a dust-up in emerging market currencies. If you live in Brazil, Argentina or South Africa, you may wish you owned more gold than embattled national currencies. That's good news - at least for gold miners. A more detailed discussion is given below in my weekly input to the Kitco Gold Survey.

The big news for metals this week is copper!

For months we have been watching the red metal wallow in the low-$3 per pound range with a few scary dips below $3 on trade war fears. All of that has changed.

Noticing a brief bounce above $3.3 yesterday, I decided to ask metals maven Janet Mirasola of Sucden Futures Inc a question: 

EM: "The June Cu rally is stunning - what's up?"

JM:"Escondida contract talks – last year the 44 day strike ended without a new contract – they are getting back to the table."

Here's a good follow-up column on that heads-up tip posted in the Wall Street Journal the same day:

Copper Toys With Four-Year High (by Benjamin Parkin et al, WSJ, June 7, 2018)

Copper appears to be headed for a sweet spot of supply restriction and increased demand.

According to WSJ:

Labor negotiations between BHP Billiton PLC and miners at its Chilean Escondida operation, the world’s largest copper mine, sparked much of the buying, traders said. Talks broke down last year, prompting a 44-day strike that boosted copper prices. Authorities in India also recently ordered Vedanta Resources PLC to close its Tamil Nadu-based copper smelter, which contributes 400,000 tons to annual global supply, after multiple people were killed at antipollution protests.

And on the demand side:

Steady growth in China and globally has also helped pull the copper market out of its rut. The World Bank estimated this week that the global economy will grow 3.1% this year, in line with 2017 despite recent upheaval in global trade relations. Recent data also showed healthy factory activity in China, which consumes around half of the world’s copper.

Isn't refreshing to see a metal move on good old supply/demand fundamentals instead of macro-fears about trade wars? Especially when prices are going up the mineshaft.

Have a relaxing weekend.

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). After a sharp dip last Tuesday, expectations appear to be on the rise again

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%. May 29th dramatically broke the trend line of higher-lows (dashed blue line) falling to 2.04%. This decline has mostly recovered with a 2.14% score 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 $3.2650 per pound ($7,198 per tonne), only 2.0% below December's high with expectations for higher prices. 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 and on a roll (see above commentary).

Total copper stored in LME and Nymex warehouses is notably higher than last week at 0.537 million tonnes.

LME inventories bounced higher: 

It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 306,750 versus Nymex 230,657 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 $1,310 per ounce. Target silver price $16.9 per ounce.

Gold price support should remain firm going into the weekend with outcome uncertainty surrounding the upcoming G7 Summit, U.S./N.K. Summit and the recent turmoil in emerging market currencies. Although reclaiming $1,300 territory this week, the yellow metal is only tenuously clinging to an upside trend of higher-lows established from December 2016.

A negative political/geopolitical outcome could propel it higher; resolution of current crises could send it to revisit its May low (Comex $1,286.8) under the weight of a strong U.S. dollar, rising equities and a U.S. economy that is heating up considerably.

I believe it likely that next week will be a mix of outcomes favoring gold to remain in its $1,300+ range. My target is $1,310 per ounce with silver moving up to $16.9 per ounce.

In retrospect, it appears that the market extremes of May 29 may have been a one-off glitch with most assets recovering or exceeding losses this week. However, that terrible Tuesday of Europe worry may follow the model of the 2010 Flash Crash - a warning that further corrections are imminent. In that scenario, gold could bounce regaining $1,360 altitudes or higher.

By the numbers, gold outpaced most key commodities this week except copper that has been on fire. In terms of comparative value, gold lost value to the euro (-0.5%), copper (-5.7%) and silver (-2.0%). Gold gained in U.S. dollar terms (+0.3%), in yen terms (+0.3%) and out performed oil (+0.2%) and the broader Bloomberg Commodity Index (BCOM +0.7%).[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 slightly stronger than last week at 6.4040 USD/CNY, but still putting a lot of daylight above the March 26th low (i.e. stronger level) of 6.2342. A low 1-month yuan volatility of 0.40% 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 0.85% & 0.65% respectively; Comex gold 1-month volatility is a low 0.78%

Weekly Summary  for June 08, 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. 

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 128.76 yen per euro as the gold euro/yen spread moderates (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 0.4711 bearishly below the key 0.5-level. 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.