Mother Nature Runs the Show
Hurricane Florence
Hurricane Florence
Friday, September 14, 2018 AM
Chinese Yuan Reversal Is Bullish Gold (Richard Baker, Kitco News, 8/27/2018)
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
Morning Miners!
Four simultaneous hurricanes in two oceans threatening Hawaii to the Carolinas plus one tropical storm and a disturbance in the Caribbean worth watching. That's how the week started. Mother Nature runs the show and what a show it is!
As Hurricane Florence makes landfall today devastating the Southeast, Super Typhoon Mangkhut approaches the Philippines with 200 mph winds. The latter is so strong it will punch the underbelly of China in the coming days. This is not normal.
Fortunately, this week's markets were tame by comparison. Comex gold is a tad up from where it was last Friday - $1,206.9 as I did my morning analysis. Reaching as high as $1,218 yesterday, the yellow metal is showing more and more signs that the bottom is in for 2018.
A roaring rally in domestics stocks could change that assessment but for now metals seem to be climbing out of the mine shaft with the announcement of new plans for a U.S./China trade talk to defuse tensions.
Here's my full explanation on gold and silver prospects provided to the Kitco's Weekly Gold Survey this morning:
In my view, the most important drivers for gold are domestic stocks, key global currencies and the gold-to-silver ratio (GSR).
Gold has been in a downward channel relative to the S&P 500 since the Presidential election, over 600 calendar days. If stocks linger near their tops or fall lower, at least one gold headwind subsides. If there is a market pop to the upside on improving trade relations with China, gold faces a serious headwind. [please see Chart to Watch Below]
Currently the most important currencies to watch are the Chinese yuan (CNY), euro (EUR) and Indian rupee (INR). A very tight correlation with the yuan and gold prices in U.S. dollars has existed since April and persists today. A 1% weaker yuan yields a 1% move down for gold in dollar terms (3-month basis). However, the euro has increased in importance in the last several weeks. Although not as dominate as the yuan, it has replaced the Japanese yen (JPY) as an important driver.
For current levels, my 3-currency gold model, which includes all three, suggests an upper bound of $1,224 per ounce; a lower bound of $1,195. I believe it likely that gold will find itself near the middle of this range next week at $1,210.
The GSR scored a new high on Tuesday above 85 ounces per ounce approaching a peak set during the financial crisis of 90.5 (November 2008). A GSR that exceeds the 80-level is often a sign that a reversal of fortunes is in the winds for precious metals. The falling rupee is the currency to watch - if it stabilizes or grows stronger there could be a sharp move up for silver. At my target gold price, silver likely will remain around the low-$14 level for now.
Here is a chart of the gold-to-silver ratio (GSR, click on image for larger size)):
For background on the gold/yuan connection, please read my latest Kitco News commentaries...
Chinese Yuan Reversal Is Bullish Gold (Richard Baker, Kitco News, 8/27/2018)
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
This mornings' price action:
Comex gold (12/18 contract) $1,206.9 per ounce,
Comex silver (12/18 contract) $14.220 per ounce
Comex copper (12/18/ contract) $2.6765 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 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 (note shaded 3-month area, click on plots for larger image):
"So goes the yuan goes, so goes gold."
Have a relaxing weekend - you deserve it!
General Moly (GMO) News
Here's an interesting press release from General Moly regarding their progress on water rights:
Eureka County, Diamond Natural Resources Protection & Conservation Association and General Moly Settle Protest Issues During Water Rights Hearing (Press Release, 9/14/2018)
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, and are moving more or less sideways [see Note].
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%, retreated and is now back to 2.12% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend line, in light blue. Note that present trend now extends to the June 21, 2017 low. Interesting to note that lower-highs from April 23rd (solid blue line) are intersect higher-lows (dashed blue line) - is inflation poised to break out? The hot hourly wage increase in August may say yes.
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 $2.6765 per pound ($5,901 per tonne), now 19.7% 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 still skirting bear territory (i.e. down 20%) but showing some signs of salvation this week.
Total copper stored in LME and Nymex warehouses is 0.416 million tonnes, notching down from last week and well below the 0.5 million tonne mark.
LME inventories are declining again after a run-up in August:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME and falling (LME 233,025 versus Nymex 183,311 tonnes):
My Input to Kitco News
Here's how I saw the weekly price action as told to the Kitco News Weekly Gold Survey (also included above in the headline comments):
Target gold price $1,210 per ounce. Target silver price $14.26 per ounce.
In my view, the most important drivers for gold are domestic stocks, key global currencies and the gold-to-silver ratio (GSR).
Gold has been in a downward channel relative to the S&P 500 since the Presidential election, over 600 calendar days. If stocks linger near their tops or fall lower, at least one gold headwind subsides. If there is market a pop to the upside on improving trade relations with China, gold faces a serious headwind.
Currently the most important currencies to watch are the Chinese yuan (CNY), euro (EUR) and Indian rupee (INR). A very tight correlation with the yuan and gold prices in U.S. dollars has existed since April and persists today. A 1% weaker yuan yields a 1% move down for gold in dollar terms (3-month basis). However, the euro has increased in importance in the last several weeks. Although not as dominate as the yuan, it has replaced the Japanese yen (JPY) as an important driver. For current levels, my 3-currency gold model, which includes all three, suggests an upper bound of $1,224 per ounce; a lower bound of $1,195. I believe it likely that gold will find itself near the middle of this range next week at $1,210.
The GSR scored a new high on Tuesday above 85 ounces per ounce approaching a peak set during the financial crisis of 90.5 (November 2008). A GSR that exceeds the 80-level is often a sign that a reversal of fortunes is in the winds for precious metals. The falling rupee is the currency to watch - if it stabilizes or grows stronger there could be a sharp move up for silver. At my target gold price, silver likely will remain around the low-$14 level for now.
[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 6.8540 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 0.40% 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 0.73% & 0.40% respectively; Comex gold 1-month volatility is 0.70%
Weekly Summary for September 14, 2018 AM
Weekly Summary for September 14, 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 130.64 as yen per euro as old euro/yen spread divergence shows a hint of weakness.
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 September 11, 2018 (0.4147). Currently this AM the AUSP is at 0.4152 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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