The Eureka Miner: Gold Breaks $1,300 Then Retreats on Blockbuster Jobs Report

Tonkin Ranch (2013)

Eureka, Nevada

Friday, January 4, 2018 AM

Next Week Target Gold Price: $1,290 per ounce, Target Silver Price: $15.78 per ounce.

Happy New Year Miners!

The new year got a good start with today's blockbuster jobs report for December - 312,000 jobs were added versus an expectation of 176,000. By a separate survey, unemployment rose to 3.9%. The participation rate bumped up to 63.1% indicating more people are interested in coming back to work. In a month, the average hourly wage popped 0.4% which is a very good number too. Stock markets roared on the news; Comex gold, that peaked at $1,300.4 per ounce yesterday, retreated to the $1,280-level.

Federal Reserve chairman Jerome H. Powell said later in the morning that low inflation would allow the central bank to be “patient” in deciding whether to continue raising interest rates. This message was welcomed by jittery investors and added an afterburner kick to already airborne stocks [Update: the Dow Jones Industrial Average closed up 747 points; the S&P 500, up 84 points or 3.4% - both very substantial moves. Comex gold closed at a respectable $1,285.8 on the February contract] .

On a more sobering note, The U.S. manufacturing PMI (Purchasing Managers Index) hit a 15-month low in December. IHS Markit's chief business economist Chris Williamson warned, "Over two thirds of manufacturers reporting higher costs attributed the rise in prices to tariffs." PMI is a leading indicator on the state of the economy; employment status is a lagging one. Something to think about.

Allen Sykora of Kitco News included my latest outlook in the Kitco Weekly Gold Report:

Richard Baker, editor of the Eureka Miner Report, looks for gold to bounce back to $1,290.

“This morning's blockbuster labor report has given a boost to the U.S. dollar that had been falling towards its 200-day average from an early-December peak,” Baker said. “Although the report indicates a vibrant domestic economy, U.S dollar support will eventually fade if U.S.-China trade tensions are not soon resolved. The shadow of soaring deficits may also start to eclipse dollar strength. Whether the Federal Reserve will continue its trajectory of rate hikes on this latest data is a key development to monitor.” [Full report can be found below]

A more detailed 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 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 in 2019.

This mornings' price action:

Comex gold (2/19 contract) $1,283.7per ounce,

Comex silver (3/19 contract) $15.705 per ounce

Comex copper (3/19 contract) $2.6110 per pound

Happy New Year!

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 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 at 1.70%. 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 below the expectation level of November 27th, 2017 (red dashed line).

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 on the jobs report news at $2.6110 per pound ($5,756 per tonne), now 20.7% 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 just technically back in bear territory (i.e. down 20% or more).

The Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) for December, released on Wednesday, 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)

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.”

Total copper stored in LME and Nymex warehouses moved up a tad to 0.241 million tonnes, and is more than one-half below the 0.5 million tonne mark of early-2018. The Nymex warehouse tonnage has now fallen behind the LME.

LME inventories continue a bump up:

It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 132,175 versus Nymex 109,45 tonnes):

My Input to Kitco News

Next Week target gold price $1,290 per ounce. Target silver price $15.78 per ounce.

Here is my input to the Kitco Weekly Gold Report:

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.

This morning's blockbuster labor report has given a boost to the U.S. dollar that had been falling towards its 200-day average from an early-December peak*. Although the report indicates a vibrant domestic economy, U.S dollar support will eventually fade if U.S./China trade tensions are not soon resolved. The shadow of soaring deficits may also start to eclipse dollar strength. Whether the Federal Reserve will continue its trajectory of rate hikes on this latest data is a key development to monitor.

Although 10-year inflation expectations are below 2%, they are falling less rapidly than 10-year Treasury rates. This results in declining real interest rates** that are bullish support for the current gold rally. Yesterday, Comex gold briefly touched the key $1,300-level but today's employment data has brought it back to $1,280 territory.

I believe gold will return to $1,290 next week with silver following to $15.78 per ounce.

* DXY 200-day average 95.93, 12/09 peak = 97.44, today 96.54

** real 10-year rate 0.90% (01/02); 1-month ago 0.98%- 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 and now appears to be stabilizing just 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 6.8697 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 a quiet 0.24%. Something else to watch compared to 1-month volatilities of euro and yen*

* the euro & yen 1-month volatilites are 0.41% & 1.51% respectively; Comex gold 1-month volatility is an elevated 1.33% as is the yen (both in safe haven mode).

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 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 Outlook for 2019 (1H)

My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019

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 123.1 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 0.5153, 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