Eureka Couthouse
Eureka, Nevada
Eureka, Nevada
Friday, August 24, 2018 AM
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
Morning Miners!
It has been quite a mix for gold this week with U.S./China low-level discussions going nowhere, the Federal Reserve reaffirming a policy of gradually increasing interest rates and high political drama in Washington.
The good news is that our lustrous hero is back above $1,200 per ounce. Prices peaked this morning to $1,214.8 on the Comex futures December contract following comments from Fed Chair Jerome Powell at the Jackson Hole symposium in Wyoming. Although prices have pulled back some, a gold close today above $1,200 would be very encouraging. Embattled copper prices have also got some giddy-up leaving bear territory to move near the key $6,000 per tonne mark (see below discussion, "Scorecard").
Kitco News editor Allen Sykora carried my thoughts on the yellow metal in Kitco's Weekly Gold Survey report:
Richard Baker, editor of the Eureka Miner Report, is also upbeat, suggesting that gold may follow the Chinese yuan.
“The People's Bank of China stabilized the yuan before this week's trade talks,” Baker said. “This morning the offshore yuan (USD/CNH) has slipped below onshore currency (USD/CNY) -- a sign traders are betting on short-term strengthening.
“This is bullish for gold; as the Chinese currency strengthens, so does [the] gold price in U.S. dollars. There are also signs that Asian demand for gold is on the rise.”
(complete discussion may be found below)
For background on the gold/yuan connection, please read my latest Kitco News commentaries...
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
This mornings' price action:
Comex gold (12/18 contract) $1,202.9 per ounce,
Comex silver (9/18 contract) $14.710 per ounce
Comex copper (9/18/ contract) $2.6985 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 these charts to see the closeness of gold price to a gold model based on these currencies, second graph (note shaded 3-month area, click on plots for larger image):
Chinese Yuan (USD/CNY)
"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 falling below trend. The July CPI was up 0.2% for an annualized inflation of 2.9% (unchanged from June). European CPI dropped 0.3% for an annualized inflation of 2.1%. Is there a whiff of disinflation (i.e. slowing inflation rate) in the air?
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% but is 2.08% 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. Wednesday's number remains below this trend.
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)
Intraday lows on the Comex exchange:
Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)
Comex copper is presently trading at $2.6985 per pound ($5,949 per tonne), now 19.5% below December's high. 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 coupled with a strong U.S. dollar have sent the red metal plummeting. Copper price is is skirting bear territory (i.e. down 20%).
Total copper stored in LME and Nymex warehouses is 0.457 million tonnes, a second weekly advance, but still below the 0.5 million tonne mark.
LME inventories are catching another gear higher:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 262,850 versus Nymex 194,748 tonnes):
My Input to Kitco News
Target gold price $1,210 per ounce. Target silver price $14.80 per ounce.
The disappointing outcome of the U.S./China low-level trade talks this week and the FOMC meeting were key drivers of gold price this week. Comments from Jerome Powell at the Jackson Hole symposium in Wyoming may add another element of volatility to gold price this morning. So far gold has caught a gear higher to break the key $1,200 psychological level on a declining U.S. dollar.
Given these mixed tides, it remains important to watch the Chinese yuan for gold direction. The People's Bank of China (PBOC) stabilized the yuan before this week's trade talks. This morning the offshore yuan (USD/CNH) has slipped below onshore currency (USD/CNY) - a sign traders are betting on short-term strengthening. This is bullish for gold; as the Chinese currency strengthens, so does the gold price in U.S. dollars. There are also signs that Asian demand for gold is on the rise.
My updated currency model for gold, which includes the euro, Japanese yen and yuan, suggests a Comex range of $1,199 to $1,228 per ounce for a yuan near current levels.
I will pick the middle of this range for next week's target: $1,210 per ounce gold. Silver will inch up to $14.80 per ounce (see attached chart)
[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 6.8340 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 0.46% is in line with major currency levels and less than gold - something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 0.99% & 0.40% respectively; Comex gold 1-month volatility is an elevated 1.29%
Weekly Summary for Aug 24, 2018 AM
Weekly Summary for Aug 24, 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 range given the strong correlation with falling currencies compared to a strong U.S. dollar is a $1,150 floor 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 [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 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 129.16 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 17, 2018 (0.4155). Currently this AM the AUSP is at 0.4197 trying to recover to the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines).
Cheers,
Colonel Possum & Mariana
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