Eureka, Nevada
Friday, February 2, 2019 AM
Next Week Target Gold Price: $1,310 per ounce, Target Silver Price: $15.86 per ounce.
High/Low range: $1,330/$1,300 per ounce
Old Timer Quiz: When did the Keyhole Bar first open?
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
Morning Miners!
Not a bad week for gold miners, pardner.
Using a baseball analogy, I forecast last Friday, "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!" BAM - a Comex high of $1,331.1 per ounce yesterday. This morning, gold has settled back to trade at $1,327.
Here are my most recent thoughts on the yellow metal as relayed to Kitco News Editor Allen Sykora this morning:
Gold achieved escape velocity this week and is in safe orbit above the $1,300-level. A dovish FOMC statement removed the expectation gravity of aggressive Federal Reserve tightening and stronger U.S. dollar - at least for the time being. Bullishly, 10-year real rates have dropped 20 basis points this month and the U.S. Dollar Index continues to struggle to stay above its 200-day average. Gold made weekly gains against key commodities, major currencies and even recovering equity markets.
Today's much stronger-than-expected employment report moderates gold's advance some but the yellow metal is showing resilience this morning. I believe it likely that gold prices will consolidate around the $1,310-level next week before advancing higher in the coming weeks. It will succeed on its push-pull ascent to $1,380+ in the first-half of 2019. Silver will find support next week just below the $16-level.
There is more supporting gold now than just the safe haven status of the last several months. Evidence for this is erosion of the tight correlation with the Japanese yen, an alternative safe haven, and with falling equities. The mantra of stocks-down-gold-up-yen-strong is giving way to days when stocks and gold advance together. Something to monitor closely [see next chart].
And what about that early morning employment report? Not bad at all after a lot of nervousness about the recent government shutdown. Headline unemployment nudged up to 4% but, by a separate survey, 304,000 jobs were added in January. Although there was a downward revision to the December numbers, the 3-month average is a healthy 241,000 per month. The U.S. economy is still purring even though global growth is slowing. Average hourly earnings were a tad disappointing, up 0.1% versus an expected 0.3%, but a 12-month gain of 3.2% is encouraging. Time to ask the boss for a raise.
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.
My recent model of gold, based on the S&P 500, 10-year real rates and the Japanese yen (USD/JPY) was quite useful for predicting upper and lower bounds. The estimation error was less than 1% but alas, it blew up this week (tecnically when errors exceed 2-standard deviations or "sigma"). This tells us there is something new underpinning gold prices - stay tuned. (click on image or larger size):
Keep the faith! Gold will go further up the stairs in 2019.
This mornings' price action:
Comex gold (4/19 contract) $1,327.7 per ounce,
Comex silver (3/19 contract) $16.070 per ounce
Comex copper (3/19 contract) $2.7785 per pound
Have a good weekend!
Inflation Watch
Inflation expectations made a 2018 high April 23, 2018 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 picking up some steam at 1.84%. 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 of 1.68% and slightly above the level of November 27, 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 bullishly trading up from last Friday at $2.7785 per pound ($6,126 per tonne), now 15.7% 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 149,100 versus Nymex 85,970 tonnes):
My Input to Kitco News
Next Week target gold price $1,310 per ounce. Target silver price $15.86 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
Gold achieved escape velocity this week and is in safe orbit above the $1,300-level. A dovish FOMC statement removed the expectation gravity of aggressive Federal Reserve tightening and stronger U.S. dollar - at least for the time being. Bullishly, 10-year real rates have dropped 20 basis points this month and the U.S. Dollar Index continues to struggle to stay above its 200-day average. Gold made weekly gains against key commodities, major currencies and even recovering equity markets.
Today's much stronger-than-expected employment report moderates gold's advance some but the yellow metal is showing resilience this morning. I believe it likely that gold prices will consolidate around the $1,310-level next week before advancing higher in the coming weeks. It will succeed on its push-pull ascent to $1,380+ in the first-half of 2019. Silver will find support next week just below the $16-level.
There is more supporting gold now than just the safe haven status of the last several months. Evidence for this is erosion of the tight correlation with the Japanese yen, an alternative safe haven, and with falling equities. The mantra of stocks-down-gold-up-yen-strong is giving way to days when stocks and gold advance together. Something to monitor closely.
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. It has strengthened in 2019. The yuan is currently at 6.7310 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 0.73%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.49% & 0.49% respectively; Comex gold 1-month volatility is slightly elevated at 1.02%.
Weekly Summary February 2, 2019
Yearly Summary for 2018
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 125.1 suggesting 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 0.4902 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 and is now trending up (i.e. higher lows).
Cheers,
Colonel Possum & Mariana
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