Eureka, Nevada
Friday, January 18, 2018 AM
Next Week Target Gold Price: $1,290 per ounce, Target Silver Price: $15.39 per ounce.
High/Low range: $1,292/$1,257 per ounce
Old Timer Quiz: Can you find the Dunderberg mine ore dumps in the above photo?
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
Morning Miners!
Gold is looking a little tired after an impressive rally that began in mid-November. Comex gold trading at $1,282 this morning is only a few dollars above its January low ($1,278.1). If it breaks below the $1,275-level, we may need to re-evaluate whether the November uptrend is intact. Stocks are on the mend and the U.S. dollar is strengthening on news that a U.S./China trade deal is on the horizon - gold is down and the Japanese yen is yawning.
Am I turning bearish? Heck no. There are enough gremlins in the shadows to keep the gold/yen safe haven play going for sometime. I'm betting this is just a consolidation before another sprint at the mercurial $1,300-level. Break through that barrier and it's blue sky for the yellow metal.
Kitco news editor Allen Sykora carried my thoughts on gold in the Kitco News Weekly Gold Report :
Richard Baker, editor of the Eureka Miner Report, also looks for gold to climb, looking for $1,380 sometime in the first half of 2019.
“It is likely gold will push up next week against a backdrop of a prolonged U.S. government shutdown and continued turmoil in Washington,” he said. “Optimism is up that the U.S.-China trade negotiations are back on track for a deal this spring, but this could flip-flop in the coming weeks. I expect U.S. dollar strength will falter and resume decline towards its 200-day average.”
My full report can be found below.
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 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 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 (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) $1,282.4 per ounce,
Comex silver (3/19 contract) $15.415 per ounce
Comex copper (3/19 contract) $2.6960 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 1.82%. 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)
This is an updated chart from that column through January 16:
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 $2.6960 per pound ($5,944 per tonne), now 18.2% 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)
Last 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 ticking up slightly after leveling off:
It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 135,025 versus Nymex 98,252 tonnes):
My Input to Kitco News
Next Week target gold price $1,290 per ounce. Target silver price $15.39 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
I remain bullish that the first-half of 2019 will see gold push-pull higher to $1,380+. This week is a good example of "pull" down as Comex gold is just a few dollars above its January low ($1,278) this morning.
The yellow metal is heading for a week of losses against a strengthening U.S. dollar together with key commodities copper and oil. Importantly, gold did log gains versus major currencies Japanese yen and euro.
It is likely gold will "push" up next week unless against a backdrop of a prolonged U.S. government shutdown and continued turmoil in Washington. Optimism is up that the U.S./China trade negotiations are back on track for a deal this spring but this could flip-flop in the coming weeks. I expect U.S. dollar strength will falter and resume decline towards its 200-day average*.
The 10-year real rate and Indian rupee remain key indicators to monitor**. The former has been in bullish decline but may be reversing higher on rising nominal rates and tepid inflation. Favoring gold buyers in India, the rupee had strengthened below 70 USD/INR but has returned to weakening trend.
There are mounting indications that the Federal Reserve will take a more dovish stance on the pace of rate increases for 2019.
My gold target for next week is a return to the $1,290-level with weaker silver moving to $15.39 per ounce.
* DXY 200-day average 94.98, 12/09 peak = 97.44, today 96.21 > 200-day
** 10-year real rate 0.95% (1/18), 0.88% (01/11); 1-month ago 0.90%- source Bloomberg; USD/INR 71.129g
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 6.7780 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 0.82%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.45% & 1.13% respectively; Comex gold 1-month volatility is 0.88%.
Weekly Summary January 18, 2019
Yearly Summary for 2018
Weekly Summary January 18, 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 124.6 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 0.4837, 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 bearish re-entry.
Cheers,
Colonel Possum & Mariana
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