Friday, December 14, 2018 AM
Target Gold Price: $1,225 per ounce Target Silver Price: $14.44 per ounce.
Morning Miners!
If you want to hear a fun song from 1931, click on the link under the headline photo. Don't step on your partner's toes!
Kind of a crummy week for the yellow metal. It was encouraging to see gold in the $1,250 neighborhood last week but it has since lost value compared to key commodities, major currencies and stock markets [See Weekly Summary Chart below].
The good news is that the moves down have been small and may reverse. The present culprit is the mighty U.S. dollar which got even more mojo after EU Central Bank Mario Draghi delivered a downbeat assessment on Europe economic prospects coupled with weak eco-data from China. Currently the U.S Dollar Index (DXY) is near 2-year highs.
There are a lot of gremlins in the latest witches' brew of gold drivers: U.S./China trade tensions, interest rate forecasts, political clouds over Washington D.C. and geo-political tensions abroad. Oh, planetary alignments are probably in the mix too!
This morning I explained the situation to Allen Sykora, editor of the Kitco Weekly Gold Survey:
Richard Baker, editor of the Eureka Miner Report, listed a downside target around $1,225 an ounce. On the positive side, he pointed out that gold has had a bullish trend of higher lows, compared to the embattled S&P 500, since the end of September.
“However, renewed U.S. dollar strength with the euro dipping below the key $1.13 level this morning blunts the bullish trend relative to equities,” Baker said. “This morning gold and the S&P 500 are tracking lower together on concerns about slowing global growth and interest rate uncertainty. I believe it likely the dollar countervailing force will continue next week to drag gold to the $1,225 level, with silver following to $14.40 per ounce.”
Further, he said, 10-year real rates are creeping above 1% even though the 10-year Treasury has fallen below 3%. “This is because inflation expectations are below 2% on a 10-year basis, canceling the normally bullish influence of lower interest rates on gold price -- another headwind for higher gold prices in the near term,” Baker said.[Full report can be found below]
Keep the faith! Gold will head back up the stairs before year's end.
“However, renewed U.S. dollar strength with the euro dipping below the key $1.13 level this morning blunts the bullish trend relative to equities,” Baker said. “This morning gold and the S&P 500 are tracking lower together on concerns about slowing global growth and interest rate uncertainty. I believe it likely the dollar countervailing force will continue next week to drag gold to the $1,225 level, with silver following to $14.40 per ounce.”
Further, he said, 10-year real rates are creeping above 1% even though the 10-year Treasury has fallen below 3%. “This is because inflation expectations are below 2% on a 10-year basis, canceling the normally bullish influence of lower interest rates on gold price -- another headwind for higher gold prices in the near term,” Baker said.[Full report can be found below]
Keep the faith! Gold will head back up the stairs before year's end.
This mornings' price action:
Comex gold (2/19 contract) $1,238.2 per ounce,
Comex silver (3/19 contract) $14.595 per ounce
Comex copper (3/19 contract) $2.7435 per pound
Have a relaxing weekend - you deserve it!
Inflation Watch
Inflation expectations made a new 2018 high April 23rd above trend lines of higher lows (dotted lines, click on chart for larger size). But now those trend lines have been broken to the downside as shown in this chart:
10-year Inflation Expectations
Note: In the above chart inflation expectations peaked at 2.14% February 2nd and then moved higher April 23rd to 2.18%. May 29th dramatically broke a trend line of higher-lows falling to 2.04%. This Wednesday expectations are much lower at 1.83%. The older trend lines of higher-lows are shown in dark blue. Those trends extend from June 21, 2017 low of 1.66%. Currently, we are back to the same expectation level as November 27th, 2017.
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 down from last week at $2.7435 per pound ($6,048 per tonne), now 17.6% 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 is very close to entering bear territory for a second time this year (i.e. down 20%). Latest China GDP numbers confirm economic slowing in the third quarter 6.5% (versus 6.6% expected) compared to 6.7% in the second quarter.
Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper in October:
- Freeport is a victim of the U.S.-China trade tensions which are prompting them and other mining companies to defer investments in new projects, and “that will add to this impending supply gap situation for the industry.”
- He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”
LME inventories continue declining after a run-up in August:
It is instructive to keep our eyes on the Nymex inventories which are no longer behind the LME but also falling (LME 120,803 versus Nymex 119,900 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 $1,225 per ounce. Target silver price $14.44 per ounce.
Starting with a positive, gold has made a bullish trend of higher-lows in value comparison to the embattled S&P 500 since the end of September (ref: the gold-to-S&P 500 ratio). This comparison has been in a downward channel since the Presidential election, nearly 530 market-days.
The move from September has lifted gold value from the lower rail to nearly the upper rail. If the S&P 500 falls below 2,600 for any sustained time, this trend implies an ascent to $1,300+ per ounce; falling equities, rising gold.
However, renewed U.S. dollar strength with the euro dipping below the key 1.13-level this morning blunts the bullish trend relative to equities. This morning gold and the S&P 500 are tracking lower together on concerns about slowing global growth and interest rate uncertainty. I believe it likely the dollar countervailing force will continue next week to drag gold to the $1,225-level with silver following to $14.40 per ounce.
Importantly, 10-year real rates are creeping above 1%* even though the 10-year Treasury has fallen below 3%. This is because inflation expectations are below 2% on a 10-year basis cancelling the normally bullish influence of lower interest rates on gold price - another headwind for higher gold prices in the near term./i>
[please see Weekly Summary Chart]
* real 10-year rate 1.06% (12/12); 0.96% (12/07) - source Bloomberg
Additional Note:
The fate of the Chinese yuan remains a key tell for gold and copper; a material drop in valuation could impact copper negatively. Something to watch: the yuan dramatically weakened from mid-April, stabilized and now appears on the move again to 7 USD/CNY.
The yuan stabilized below 7.0 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is near the 7.0-level at 6.9501 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 is 0.50%. Something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 0.38% & 0.40% respectively; Comex gold 1-month volatility is an slightly elevated 1.05%
Weekly Summary for December 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:
*** COMING SOON: 2019 GOLD PRICE FORECAST ***
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 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)
Gold value for all three currencies is trending higher after a double-bottom for gold in U.S. dollar terms (August 17th & September 27th) :
Click on the image for a larger size:
Gold in euro & yen terms with margin above 2013 lows
Divergence has resumed 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 128.24
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 27, 2018 (0.4063). Currently this AM the AUSP is at 0.4705, maintaining an impressive gain above the September 27th low and approaching the upper rail (dotted green line).
Cheers,
Colonel Possum & Mariana
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