Eureka, Nevada
Friday, January 25, 2018 AM
*** BREAKING NEWS ***
Comex gold touched $1,305.3 today and closed at $1.298.1
(2/19 contract)
Next Week Target Gold Price: $1,300 per ounce, Target Silver Price: $15.66 per ounce.
High/Low range: $1,293/$1,257 per ounce (key breakout to $1,300)
Old Timer Quiz: When was the first Eureka High School Rodeo?
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
Morning Miners!
It takes three strikes in baseball to strike out. I believe gold price is at a full count with one strike to go. But like many successful hitters, it takes a few tries to size up the pitcher then BAM - right in the sweet spot. Gold at least gets a base hit to $1,300 next week after two strikes this month - maybe even a home run to $1,320!
Kitco news editor Allen Sykora carried my thoughts on gold in the Kitco News Weekly Gold Report :
“I believe next week is a make-or-break week for gold,” said Richard Baker, editor of the Eureka Miner Report. “After two early attempts this month to break and stay above the mercurial $1,300-level, it is likely this time that the yellow metal will succeed on its push-pull ascent to $1,380-plus in the first half of 2019.”
I added a few more thoughts in my full report (given below):
This week, Comex gold put in a new January low ($1,275) only to vault higher this morning gaining on key commodities, major currencies and stocks for the week. This establishes a firm foundation for the next steps higher. The U.S. dollar index has again weakened with only a thin margin above its 200-day average.* Real interest rates have paused under 1% which is also bullish gold**.
Beside these technical observations supportive of gold price, none of the goblins that caused investors return to safe haven have been removed: prolonged government shutdown, U.S./China trade war, Brexit uncertainty and turmoil in Washington. Resolution of one or more of these issues could change the bullish environment for the current gold rally.
The Guardian commodities journalist Debbie Carlson explains some of the key factors behind recent gold prices:
Gold prices gleam amid Brexit and US shutdown uncertainty (Debbie Carlson, The Guardian, 1/18/2018)
A detailed gold price analysis is presented in my latest Kitco News commentaries:
What Do Stocks, Real Rates & Japanese Yen Tell Us about Gold? (Kitco News, 1/22/2019)
Gold Versus Real Rates: $1,380+ by May Day 2019 (Kitco News, 1/2/2019)
An updated chart from the latest commentary can be found next in below the next paragraph. Also, checkout the "Yearly Summary 2018" in chart form below.
I have modified my model of gold, now based on the S&P 500, 10-year real rates and the Japanese yen (USD/JPY). Real rates have replaced the CBOE VIX as an input and performance has improved on a 3-month basis This is a useful model for predicting upper and lower bounds. The estimation error is less than 1%. These bounds are now included under the headline along with my targets for next week's gold and silver prices. I predict a breakout above the upper bound next week (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) $1,291.4 per ounce,
Comex silver (3/19 contract) $15.555 per ounce
Comex copper (3/19 contract) $2.6930 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 moving sideways 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 are recovering from the January 3 low to near 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)
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 sideways from last Friday at $2.6930 per pound ($5,937 per tonne), now 18.3% below the December 2017 high. Improving global growth had kept the red metal above the key $3 per pound-level. 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 moving away from bear territory (i.e. down 20% or more) on new optimism about a U.S./China trade deal this spring .
The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December 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)
Update (1/21/2019): China GDP for 2018 was a slower 6.6% with the last quarter at an annualized 6.4% - the slowest quarter since 1990!
Earlier this month 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 bumped up up this week:
It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 145,575 versus Nymex 92,421 tonnes):
My Input to Kitco News
Next Week target gold price $1,300 per ounce. Target silver price $15.66 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
I believe next week is a make-or-break week for gold. After two early attempts this month to break and stay above the mercurial $1,300-level, it is likely this time that the yellow metal will succeed on its push-pull ascent to $1,380+ in the first-half of 2019. Failing this, gold may experience decline but find comfort above $1,250 per ounce, gather resolve and rise again in the coming weeks.
This week, Comex gold put in a new January low ($1,275) only to vault higher this morning gaining on key commodities, major currencies and stocks for the week. This establishes a firm foundation for the next steps higher.
The U.S. dollar index has again weakened with only a thin margin above its 200-day average.* Real interest rates have paused under 1% which is also bullish gold**.
Beside these technical observations supportive of gold price, none of the goblins that caused investors return to safe haven have been removed: prolonged government shutdown, U.S./China trade war, Brexit uncertainty and turmoil in Washington. Resolution of one or more of these issues could change the bullish environment for the current gold rally.
My gold target for next week is a close above $1,300-level with silver following to to $15.66 per ounce.
* DXY 200-day average 95.89, 12/09 peak = 97.44, today 96.02 > 200-day
** 10-year real rate 0.95% (1/25), 0.95% (01/18): 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 6.7498 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 0.75%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.52% & 0.79% respectively; Comex gold 1-month volatility is a calm 0.39% - that could change soon.
Weekly Summary January 25, 2019
Yearly Summary for 2018
Weekly Summary January 25, 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 124.8 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 0.4851, losing a lot of its impressive gain above the October 1st low and 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 but is now very close to re-entry.
Cheers,
Colonel Possum & Mariana
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