"Bovine Contentment"
Lone Mountain, Nevada
Lone Mountain, Nevada
Friday, July 27, 2018 AM
What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)
Target Gold Price: $1,220 per ounce Target Silver Price: $15.4 per ounce.
Morning Miners!
Copper may be in better pasture, gold is not.
From nearly entering bear country, the red metal has rebounded more than 5% from its July 19 low of $2.6735 (Comex Exchange). It got an additional boost this morning on a robust second quarter GDP of 4.1% - a growth rate not seen in 14 years. Although lower than some expected (4.2 to 5.0%), this is welcome news for a copper demand picture that has been shadowed by China's slowing economy and ongoing trade war with the U.S.
Like gold, copper mining is facing rising costs and lower grades worldwide which will push prices higher on improving industrial metal demand. Nick Mather, CEO & managing director of DGR Global, believes the red metal is on the verge of a major breakout:
Copper is Hot Right Now (Kitco News Video, 7/27/2018)
So what about gold? Nuts.
Allen Sykora relayed my latest thoughts on the yellow metal in his Weekly Kitco Gold Survey:
Richard Baker, editor of the Eureka Miner Report, sees gold weaker, citing gold’s recent fall being in lock step with the Chinese yuan.
“This tight relation between gold and the Chinese currency began with escalating U.S.-China trade tensions in late March; both gold and [the] yuan have plummeted in value since,” Baker said. “Today's yuan above 6.8 USD/CNY is statistically consistent with $1,213 gold bounded by $1,228 above and $1,197 below. A retest of $1,210 is now likely suggesting more pain may be on the way if the correlation holds.”
Last week, I was fairly confident gold would skip a retest of its recent low; this Friday, I'm not as sure watching the yuan exceed the key 6.8 USD/CNY level (higher number = weaker currency). A floor of $1,220 seemed reasonable last Friday and will be my target price for next week - let's see what happens (my full report is given below).
Explaining why gold and the yuan are so intertwined is a real mystery. Commodity journalist Debbie Carlson interviewed the ole Colonel on this subject recently. Some of my thoughts are in this U.S. News & World Report column.
What's Behind Tumbling Gold Prices? (Debbie Carlson, US News & World Report, 8/2/2018)
Richard Baker, editor of The Eureka Miner, a metals newsletter, notes gold and the yuan have moved in lock-step since U.S./China trade tensions started escalating in March. China is a top global gold buyer with both its central bank and citizens keen purchasers.
"Currency devaluation is certainly in the PBOC (People's Bank of China) tool box to combat U.S. tariffs, the problem is how to do it without initiating capital flight," he says. "Their central bank may be calculating that a gold-based 'soft' devaluation is the best way to minimize capital leaving the country while delivering an effective trade counterpunch."
More detail is given in my recent Kitco news column:
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)
This mornings action:
Comex gold (8/18 contract) $1,224.3 per ounce
Comex silver (9/18 contract) $15.460 per ounce
Comex copper (9/18/ contract) $2.7470 per pound
Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) now begins to play a part too. 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 on these two currenies (note shaded 3-month area, click on plot for larger image, Update 8/03):
Let's hope the resumption of U.S./China trade talks and PBOC intervention to support their currency brings some strength back to gold and the yuan.
Have a relaxing weekend - you deserve it!
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 now 2.13% 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 $2.8140 per pound ($6,204 per tonne), now 15.6% below December's high with 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. However, copper price may miss bear bear territory (i.e. down 20%) given today's robust GDP, rising mining costs and lower grades worldwide.
Total copper stored in LME and Nymex warehouses is 0.463 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 252,400 versus Nymex 210,608 tonnes):
My Input to Kitco News
Target gold price $1,220 per ounce. Target silver price $15.4 per ounce.
Gold bearishly lost value this week compared to a broad set of assets including key commodities, domestic equities and major currencies euro and Japanese yen.
This morning's robust second quarter GDP caused put further pressure on the yellow metal but a weaker-than-expected number kept it above $1,220 per ounce.
An apparent easing of U.S./Europe trade tensions this week created an additional headwind for gold although resolution of trade wars with China are far from certain.
I believe it likely Comex gold will precariously hold the $1,220-level next week. Silver should follow in $15.4 territory.
It is perplexing that the fall in gold price and the Chinese yuan are in lock-step. This stunning correlation continues to improve on a 3-month basis [see updated chart above]. This tight relation between gold and the Chinese currency began with escalating U.S./China trade tensions in late-March - both gold and [the] yuan have plummeted in value since.
Today's yuan above 6.8 USD/CNY is statistically consistent with $1,213 gold bounded by $1,228 above and $1,197 below. A retest of $1,210 is now likely suggesting more pain may be on the way if the correlation holds.
[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 dramatically 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 above the 6.8-level at 6.8197 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 0.99% 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 0.40% & 0.80% respectively; Comex gold 1-month volatility has elevated to 1.14%
Weekly Summary for July 27, 2018 AM
Weekly Summary for July 27, 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 (assumption being put to the test next week! Please see above discussion).
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 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 this Kitco News 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
Divergence resumes for gold in terms of euro compared to yen:
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 129.37 yen per euro as the gold euro/yen spread resumes divergence.
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 (0.6849). It bottomed again December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661). Currently this AM the AUSP is at a new low of 0.4310 bearishly below the downward trending channel (green/red dotted lines).
Cheers,
Colonel Possum & Mariana
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