Eureka, Nevada
Friday, January 11, 2018 AM
*** BREAKING NEWS (1/14/2019, 5:31 AM) ***
Combining two gold industry leaders, Newmont Mining (NYSE:NEM) is buying all the shares of its smaller rival Goldcorp (NYSE:GG) in an all-stock deal valued at $10B.
Next Week Target Gold Price: $1,280 per ounce, Target Silver Price: $15.51 per ounce.
High/Low range: $1,306/$1,270 per ounce
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
Morning Miners!
Just across my transom this morning (5:06 AM) is news that Newmont Mining plans to cut 120 jobs from its Carlin operations. Newmont decided to reduce the life span of one mine and is suspending part of another due to a wall failure.
In their latest quarterly report they announced they would take a writedown due to a change to the mine plan of the Emigrant open pit mine at Carlin. This reduces its life span that was originally set at 14 years.
Carlin contains seven mines and is the biggest of four Newmont gold mining operations in Nevada.
The impressive gold rally since mid-November may be asking for a rest. Today Comex gold is at a respectable $1,289 per ounce but has failed twice to close above $1,300 in the last two weeks. I continue to be bullish for 2019 as I explain in my input to the Kitco News Weekly Gold Report given below.
Noted commodity journalist Debbie Carlson explains in this column how you can take part in the Lustrous One's recent ascent with Exchange Traded Funds (ETF):
Gold Sparkles As Possible Portfolio Diversifier (Debbie Carlson, ETF Advisor, 01/09/2019)
A more detailed gold price outlook analysis can be found in my latest Kitco News commentary:
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
An updated gold and real rate plot from this commentary can be found next in "Inflation Watch." Also, checkout the "Yearly Summary 2018" in chart form below.
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 useful model 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 in 2019.
This mornings' price action:
Comex gold (2/19 contract) $1,288.5 per ounce,
Comex silver (3/19 contract) $15.615 per ounce
Comex copper (3/19 contract) $2.6435 per pound
Have a good weekend!
Inflation Watch
Inflation expectations made a 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 2, 2018 and then moved higher April 23 to 2.18%. May 29 dramatically broke a trend line of higher-lows falling to 2.04%. This Wednesday expectations are much lower but on the way back up 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 recovering from the January 3 low to the level of November 27th, 2017 (red dashed line).
My latest Kitco News commentary explains the importance of tracking "real rates" which are a function of inflation expectations:
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
This is an updated chart from that column through January 9:
10-year Real Rates & Comex Gold (Five Years)
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 (note new continuous chart baseline):
Gold $1,365.4 per ounce (continuous chart April, 2018)
Silver $18.160 per ounce (continuous chart September 2017))
Copper $3.2955 per pound ($7,265 per tonne, continuous chart December 2017)
Comex copper is presently trading up from last Friday at $2.6435 per pound ($5,828 per tonne), now 19.7% below the December 2017 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 technically skirting bear territory (i.e. down 20% or more).
The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December, released on last week, fell to 49.7 from 50.2 in November, marking the first contraction since May 2017. Economists polled by Reuters had forecast only a marginal dip from November to 50.1, just above the neutral 50-mark dividing expansion from contraction on a monthly basis. (Reuters 1/1/2019)
This week China inflation numbers fell below expert expectations further suggesting a slowing Chinese economy (CPI 1.9% year-on-year versus 2.1% expected).
Update (1/14/2019): The U.S. dollar value of China imports fell 7.6% year-over-year versus an expectation of 5.0%. The is the largest pullback in two years underling the impact of U.S. tariffs
Freeport McMoRan (FCX) CEO Richard Adkerson made two important observations on copper late last year:
- 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 are leveling off after a recent rise:
It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 132,265 versus Nymex 104,493 tonnes):
My Input to Kitco News
Next Week target gold price $1,280 per ounce. Target silver price $15.51 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
Although I remain bullish that the first-half of 2019 will see gold push-pull higher to $1,380+, it appears the impressive rally from the mid-November lows is stalling. There have been two runs at $1,300 that have failed on a closing basis; from a higher-low perspective, the $1,265-level is worth defending. Renewed confidence in the U.S. economy and a rebound in stocks are headwinds for the near term.
However, the U.S. dollar Index* has just crossed below its 200-day average and real rates**, although slowing on tepid inflation data, have not reversed higher. This sets the stage for further gold price increases in the weeks ahead against a volatile backdrop of Washington and geopolitical uncertainty.
A resolution of the government shutdown and current U.S./China trade negotiations are key developments to monitor.
There are mounting indications that the Federal Reserve will take a more dovish stance on the pace of rate increases for 2019.
It's likely the yellow metal will consolidate around $1,280 per ounce next week with silver following at $15.51 per ounce.
* DXY 200-day average 95.90, 12/09 peak = 97.44, today 95.68 < 200-day
** real 10-year rate 0.88% (1/11), 0.90% (01/04); 1-month ago 1.05%- 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 2018 and now appears to be stabilizing below 7.0 USD/CNY again.
The yuan stayed below 7.0 USD/CNY for 2018, starting stronger and then followed by a weakening trend. The yuan is currently at 6.7595 USD/CNY putting a lot of daylight above the March 26, 2018 low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility is 0.56%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.53% & 1.73% respectively; Comex gold 1-month volatility is an elevated 1.39% as is the yen (both still in safe haven mode).
Weekly Summary January 11, 2019
Yearly Summary for 2018
Weekly Summary January 11, 2019
Yearly Summary for 2018
(click on table for larger size)
Although Comex gold price lost some steam in 2018 (down 2.1%) it made healthy gains on key commodities copper and oil (up 22.8% & 30.2%). Against the broader Bloomberg Commodity Index (BCOMTR:IND), it advanced a respectable 10.3%.
Importantly the yellow metal outpaced the S&P 500 stock index by 4.3% making it a better investment than domestic stocks for 2019. This leaves gold it in a strong position for 2019.
Only the Japanese yen, an alternative safe haven, fared better by gaining 4.1% over gold for the year.
Yearly Summary for 2017
(click on table for larger size)
Comex gold gained nearly 14% for 2017 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 Outlook for 2019 (1H)
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
The first-half of 2019 will be a push-pull to higher $1,380+ gold prices underpinned by a trend of higher lows. This outlook is based on a weakening U.S. dollar and real interest rates that have peaked for the near-term against a volatile backdrop of Washington and geopolitical uncertainty.
Over the last five years, gold has been negatively correlated with 10-year real rates 71% of the time. This is reassuring given the popular assumption about opportunity cost for holding a gold position – the higher real rates go, the more costly to keep a non-interest bearing asset like gold. Falling real rates support rising gold prices and vice-versa. Less often, more dominant drivers are at play and gold price appears insensitive to changes in real rates. The low gold price volatility from mid-April to late-September is a good example. Over this time, the yellow metal behaved as a currency. It was highly correlated with the Chinese yuan; to a lesser degree, the euro and yen; and much less, to real rates.
Which case will be true for the first half of 2019? My latest Kitco Commentary posits the former to be the most likely which is bullish for gold:
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
In addition to real rates, other important charts to monitor are 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 124.3 suggesting a pickup in divergence from parity.
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 October 1, 2018 (0.4063). Currently this AM the AUSP is at 0.4991, maintaining an impressive gain above the October 1st low but below the recent high of 0.5409 set at the close December 21, 2018. Importantly, the ratio has broken the upper rail (dotted green line) of the downward trending channel.
Cheers,
Colonel Possum & Mariana
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