Refreshing memory for a hot August
Big Smoky Valley, Nevada
Big Smoky Valley, Nevada
Friday, August 10, 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)
Morning Miners!
"One fourteen - what!?" My first words this morning before my first coffee. You can buy a euro for only $1.14 - time to take a vacation to Europe, pardner - that's cheap. What happened?
The U.S. Dollar Index (DXY) responded to the euro's slip with a high not seen in 14 months (96.31). A strong dollar has become a big problem for commodities and emerging economies that took on too much dollar-denominated debt. Turkey is the poster child for this despair facing steel tariffs and sanctions from the U.S. to compound their debt problems. This week, the Turkish lira fell down the mine haft along with the ruble with Russia facing its own sanctions and tariffs.
Allen Sykora used my input in the Kitco Weekly Gold Survey:
Richard Baker, editor of the Eureka Miner Report, also said gold is heading lower.
“Gold finds itself just another embattled currency as the Turkish lira and Russian ruble tumble,” he said. “It has not demonstrated its usual safe-haven appeal as financial distress spreads in emerging-market economies. However, as the U.S. dollar index scores a level not seen since June of last year, the yellow metal has shown resilience around $1,220 level for most of August with only a few brief but scary dips.” [see full report below]
The $1,220-level still looks pretty good to me.
Commodity journalist Debbie Carlson interviewed the ole Colonel on gold prices recently. Some more 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."
Please read the whole piece, Debbie Carlson has a gift for understandably consolidating an array of expert opinions on current falling gold prices.
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)
...and input to this week's Kitco News Gold Survey below.
This mornings price action:
Comex gold (12/18 contract) $1,221.3 per ounce,
Comex silver (9/18 contract) $15.345 per ounce
Comex copper (9/18/ contract) $2.7495 per pound
Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) and euro (EUR/USD) now begin 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 currencies (note shaded 3-month area, click on plot for larger image):
"So goes the yuan goes, so goes gold."
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. The July CPI reported this morning was up 0.2% for an annualized inflation of 2.9% (unchanged from June).
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 a 2.11%% 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 $2.7495 per pound ($6,062 per tonne), now 17.5% below December's high with recent expectations for higher prices cooling. 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 will probably miss bear bear territory (i.e. down 20%).
Total copper stored in LME and Nymex warehouses is 0.449 million tonnes, lower than last week and well below the 0.5 million tonne mark.
LME inventories are descending:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME and also falling (LME 249,150 versus Nymex 200,039 tonnes):
My Input to Kitco News
Target gold price $1,220 per ounce. Target silver price $15.3 per ounce.
Gold finds itself just another embattled currency as the Turkish lira and Russian ruble tumble. It has not demonstrated its usual safe-haven appeal as financial distress spreads in emerging market economies. However, as the U.S. dollar Index scores a level not seen since June of last year, the yellow metal has shown resilience around $1,220-level for most of August with only a few brief but scary dips.
I have been pointing out the stunning correlation of gold with the falling Chinese yuan for some time. Adding the Japanese yen and euro to my gold/yuan model [above] leaves very little unexplained variance. Statistically, current Comex gold and FX levels suggest a lower bound of $1,204 per ounce and an upper bound of $1,227 in the near-term.
I believe it likely Comex gold will precariously hold the $1,220-level next week. Silver should follow in $15.3 territory.
Encouragingly, gold has outpaced key commodities this week. Comparative value increases are 0.4% for copper, 1.5% for crude oil (WTI) and 0.6% for silver.
[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 6.8465 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility of 0.76% is coming in line with major currency levels and comparable to gold - something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 0.63% & 0.63% respectively; Comex gold 1-month volatility is a low 0.56%
Weekly Summary for Aug 10, 2018 AM
Weekly Summary for Aug 10, 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 Comex 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 7/19 (August contract), but I believe it likely that prices going forward will remain around the $1,220 floor (Contracts have rolled to December and gold made a new $1,212.5 low on that contract August 3. Forays below $1,220 have, however, recovered quickly).
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 126.79 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 December 20, 2016 (0.4973) trended higher but then bearishly bottomed again December, 12, 2017 (0.4661) and again August 8, 2018 (0.4260). Currently this AM the AUSP is at 0.4301 bearishly near the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines).
Cheers,
Colonel Possum & Mariana
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