Gold Bounces Back from $1,210 - Is the Bottom In?

"Pinch the tails, suck the heads"
Patterson, Louisiana

Friday, July 20, 2018 AM

Latest Mining Quarterly!

Miners Holding Steady In Face Of Lower Gold Prices -- McEwen (Kitco News, July 18,2018)

Target Gold Price: $1,235 per ounce Target Silver Price: $15.5 per ounce.

Morning Miners!

Still on vacation in Louisiana but that hasn't stopped markets from taking some high speed hairpin curves in the world of metals.

You may recall my December gold bet for 2018 (see forecast below):

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

If you took that bet you're buying beers in celebration this week since Comex gold dipped to $1,210.7 per ounce yesterday as silver and copper touched 12-month lows.

An optimist might say, "Good. With that out of the way, let's take on $1,380!"

Ah shucks, why not. All three metals are rallying off their lows this morning:

Comex gold (8/18 contract) $1,229.8 per ounce, low = $1,210.7  7/19/2019

Comex silver (9/18 contract) $15.450 per ounce, low = $15.185  7/19/2018

Comex copper (9/18/ contract) $2.7345 per pound, low = $2.6735  7/19/2018

Please read my input to the Kitco News Weekly Gold Survey to find out what may happen next.

(my full report below)

Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues to strengthen. You don't need to understand all the statistical gibberish on this chart to see the closeness of gold price to a gold model based solely on the Chinese currency (note shaded 3-month area):

The bottom line is, "so goes the yuan, so goes gold."

Let's hope the resumption of U.S./China trade talks and PBOC intervention to support their currency brings some strength back to gold, silver, copper and the yuan.

Have a relaxing weekend - you deserve it!

Latest Mining Quarterly!

Inflation Watch

Inflation expectations made a new 2018 high April 23rd above a  trend lines of higher lows (dotted lines, click on chart for larger size). After a sharp dip last on May 29th, expectations recovered but now appear to be leveling off.

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked at 2.14% February 2nd but were surpassed April 23rd at 2.18%. May 29th dramatically broke the trend line of higher-lows falling to 2.04%. This decline recovered to 2.12% and slumped to 2.09%% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21, 2017 low.

Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This 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.

 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 $2.7345 per pound ($6,128 per tonne), retreating to 18.0% below December's high with low expectations for higher prices. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there have sent the red metal lower - copper is now nearly in bear territory (i.e. down 20%).

Total copper stored in LME and Nymex warehouses is 0.474 million tonnes, lower than last week and well below the 0.5 million tonne mark.

LME inventories are in decline: 

It is instructive to keep our eyes on the Nymex inventories which are behind the LME and also falling (LME 265,475 versus Nymex 220,984 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 $1,235 per ounce. Target silver price $15.5 per ounce.

Gold, silver and copper took a beating this week in response to weakening China economic data and a U.S. Federal Reserve resolved to remain on a path of raising interest rates, albeit gradually.

However, all three metals reversed higher from 12-month lows after President Trump again expressed displeasure at the Fed's plan and the strong U.S. dollar. Words matter.

I believe it likely Comex gold will find some relief from its perilous descent to $1,210.7 Thursday and regain the $1,235-level next week. Silver should find comfort in $15.5 territory.

The stunning correlation of Comex gold to the depreciating Chinese yuan continues to improve on a 3-month basis (see updated chart above). This tight relation began with escalating U.S./China trade tensions in late-March - both gold and yuan have plummeted in value since. However, it appears the PBOC is now stepping in to shore up the embattled currency as gold and the yuan reverse higher.

A strengthening to 6.7 USD/CNY is statistically consistent with $1,235 gold bounded by $1,250 above and $1,219 below. A return to $1,210 is unlikely suggesting a near term bottom is in place.[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 impact both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been weakening since mid-April.

The yuan stabilized below 7 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is now approaching the 6.8-level at 6.7652 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. An elevated 1-month yuan volatility of 1.11% is now above major currency levels - something else to watch compared to 1-month volatilities of euro, yen and gold.*

* the euro & yen 1-month volatilites are 0.41% & 0.97% respectively; Comex gold 1-month volatility has elevated to 1.19%

Weekly Summary  for July 20, 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 latest revised floor price given the strong correlation with the depreciating yuan is  $1,220 with highs not exceeding $1,380 per ounce. Comex gold punched in a low of $1,210.7 Thursday 7/18, but I believe it likely that prices going forward will remain above a $1,220 floor. 

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 [Gold bet won this week, Thursday July 19]

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 recent fall in gold value for all three currencies: 

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 130.93 yen per euro as the gold euro/yen spread falls below recent divergence trend.

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) and June 15, 2018 slightly lower (0.4599). Currently this AM the AUSP is 0.4387 bearishly breaking below the downward trending channel (green dotted lines) and only marginally above the recent low.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.