Gold dips to $1,236 - 12-month lows for Au, Ag & Cu; Watch the Yuan

"Ain't worried about nuthin'...."

Friday, July 13, 2018 AM

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Target Gold Price: $1,235 per ounce Target Silver Price: $15.7 per ounce.

Morning Miners!

7-11 certainly wasn't a lucky pair for copper this week as it punched in a new low on that date - $2.7170 per pound on the Comex futures exchange.

The red metal's bad luck extended to Comex gold and silver on this Friday the 13th morning. All three metals have visited 12-month lows while the U.S. Dollar Index hovers at the top of its range. Current trading:

Comex gold (8/18 contract) $1,242.3 per ounce

Comex silver (9/18 contract) $15.835 per ounce

Comex copper $2.7795

Nuts! Trade wars and present geopolitical tensions have taken a toll on metal prices, pardner.

Allen Sykora of the Kitco News Weekly Gold Survey shared my thoughts this morning:

Richard Baker, editor of the Eureka Miner Report, described the depreciating Chinese yuan as one of the most “startling correlations” with the foreign-exchange market. “This correlation goes back to the erosion of U.S.-China trade relations beginning in late March. As the yuan weakens, so does gold,” Baker said. “Interestingly, gold's relation to the yuan is stronger than correlation to the U.S. dollar index over this period. If this correlation holds, Comex gold will trend toward the $1,230 level as the yuan approaches 6.7 USD/CNY.”

(my full report below)

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 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 has been flat scoring 2.11% last 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, 2018 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 $2.7795 per pound ($6,128 per tonne), retreating to 16.6% 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 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 0.486 million tonnes, now 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 $15.7 per ounce.

After a roller coaster week of trade war and geopolitical tensions gold, silver and copper find themselves at 12-month lows as the U.S. Dollar Index nears the top of its range.

The correlation of the depreciating Chinese yuan with Comes gold prices remains one of the most startling correlations in FX markets. This started with the erosion of U.S./China trade relations beginning in late-March - as the yuan weakens so does gold. Interestingly, gold's relation to the yuan is stronger than correlation to the U.S. Dollar Index over this period.

If this correlation holds, Comex gold will trend toward the $1,230-level as the yuan approaches 6.7 USD/CNY. I believe next week the yellow metal will therefore revisit today's low ($1,236.2) for a target price of $1,235 per ounce (see attached model). Silver will track gold lower to $15.7 per ounce perhaps offering a real buying opportunity. [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 6.7-level at 6.6920 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 1.38% 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 0.45% & 0.68% respectively; Comex gold 1-month volatility has elevated to 1.21%

Weekly Summary  for July 13, 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. 

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 dropped the floor to $1,220, the playing field is starting to tilt towards the half-empty folks 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 both charts. 

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 130.99 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 0.4606 bearishly below the key 0.5-level and only marginally above the recent low.

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.