Gold Touches $1,270; Worst December for Stocks Since 1931

Early underground works (1932 map)

Louis Gibellini Tunnel upper left (yellow)
Windfall Mine, Eureka, Nevada

Friday, December 21, 2018 AM

Next Week Target Gold Price: $1,280 per ounce, Target Silver Price: $14.98 per ounce.

Morning Miners!

At the dawn of the Great Depression, hard rock miner Louis Gibellini strapped on his snow skis and skied from the town of Eureka south to the Windfall gold mine. He had obtained a lease on this property to expand an extensive network of underground diggings. The 1932 map in the headline photo shows the Gibellini Tunnel in yellow (upper left). 

The moral of this story is the old adage that when the goings get tough, the tough get going. Louis made out pretty well on his investment and became a Eureka legend. You can read more about his accomplishments and the Windfall mine in this story I wrote several years ago for the Elko Daily Free Press:

Eureka’s Windfall – Birth of a modern gold district with community spirit 

(Elko Daily Free Press, 9/10/2015)

It was a horrible week for U.S. stocks heading to score the worst December since 1931 - since the Gibellini tunnel! All indices are in correction and the S&P 500 nearly entered bear country by dipping to a morning low of 2,434.85, (down 17.2%, you start seeing bears when this index is 20% below September's all time high).

Now we're not headed for a depression, the economy is still strong and few predict a recession is on the near horizon. But the events of December are at least enough to make investors nervous given  unresolved U.S./China trade relations, mounting problems in Washington, D.C. and a Federal Reserve undeterred from raising interest rates in 2019 (albeit at a slower pace than anticipated earlier this year).

Let's take a lesson from Louis! Gold has always been a saving grace for Eureka and the yellow metal had a terrific week while everything else headed south. Comex gold touched $1,270.3 yesterday and has broken away from the stranglehold stocks have had on the yellow metal since the Presidential election [see Chart to Watch below].

Here's how I explained the situation to Kitco News this morning:

With all the market tumult this week gold shone brightly. It gained significant value compared to domestic equities in correction, falling commodity prices and major currencies. Only the Japanese yen fared slightly better, an alternative safe haven during market stress,. 

Importantly, gold broke a long-term trend of losing value to a key benchmark stock index. The yellow metal has been losing value to the S&P 500 since the U.S. election within a downward channel - a 529 market-day slide. Starting this week, gold broke aggressively out this channel even against the background of a persistently strong U.S. dollar. The recent ratio rally began at the Fed's previous interest rate bump in late September and accelerated with the Fed decision to raise rates again Wednesday. 

This clears the skies for a run at the $1,300-level. I believe gold will rise to $1,280 next week with silver just below the $15-level at $14.98 per ounce. Additionally, 10-year real rates* retreated from recent highs as the 10-year Treasury yields languish below 3% - another bullish indication for near-term gold prices.

* real 10-year rate 1.01% (12/21); 1.06% (12/14) - source Bloomberg

I have a new model of gold based on the S&P 500, CBOE Volatility Index (VIX) and Japanese yen (USD/JPY). This is a work in progress but is already useful for predicting upper and lower bounds with an estimation error of less than 1%. Upper bound suggests $1,300 per ounce is now in the cards. (click on image for larger size):

Keep the faith! Gold will go further up the stairs before year's end.

This mornings' price action:

Comex gold (2/19 contract) $1,263.7 per ounce, 

Comex silver (3/19 contract) $14.785 per ounce

Comex copper (3/19 contract) $2.6960 per pound

Merry Christmas!

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 dramatically 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 1.80%. 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 below the expectation level of November 27th, 2017 (red dashed line).

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 $2.6960 per pound ($5,944 per tonne), now 19.1% below last 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:

1. 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.” 
2. He also noted that speculators are bearish about copper “due to macro-drivers, and this is having a significant impact on price.”

Total copper stored in LME and Nymex warehouses moved up a tad to 0.243 million tonnes, but is still more than one-half below the 0.5 million tonne mark of earlier this year. The Nymex warehouse tonnage has now fallen behind the LME.

LME inventories got a welcome bump up:

It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 128,350 versus Nymex 114,594 tonnes):

My Input to Kitco News 

No survey conducted this week. My prediction for next week:

Target gold price $1,280 per ounce. Target silver price $14.98 per ounce.

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 6.9038 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 0.47%. Something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.29% & 0.67% respectively; Comex gold 1-month volatility is an slightly elevated 1.13%

Weekly Summary  for December 21, 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 127.25 

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 0.5101, maintaining an impressive gain above the September 27th low breaking above the upper rail (dotted green line). 

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted.