Friday, February 22, 2019 AM
Next Week Target Gold Price: $1,340 per ounce, Target Silver Price: $15.96 per ounce.
High/Low range: $1,352/$1,314 per ounce
My 2019 Beer Bet: Gold will rise above $1,380 per ounce by May Day 2019
Morning Miners!
Where to begin? A great week for the metals as corporate elephants begin to dance.
Let's start with copper. Today, the red metal rocked on the London Metal Exchange (LME) to $6,458 per tonne, the highest level since last July. That's $2.93 per pound coming very close to the key-$3 per pound level. Comex copper followed, trading within a penny or two of the LME this morning - up nearly 5% for the week. Most of this pop comes from improving sentiment about the ongoing U.S./China trade negotiations.
Comex gold was no slouch either coming within a whisker of the $1,350-level Wednesday ($1,349.4), currently trading currently at $1,331.5 per ounce. This is how I framed the outlook for Kitco News this morning:
Even with currents of optimism flowing, the broader view of declining global growth keeps safe haven plays like gold in gear. This is allied by a whiff of commodity inflation with higher oil prices and copper just below the key $3 per pound level - the broader Bloomberg Commodity Index (BCOM) is once again above 170, a high for 2019. Inflation expectations are also picking up keeping 10-year real rates suppressed below 1%. This provides an improving environment for gold investors. [see inflation expectation chart]
Gold also outpaced major currencies euro and yen this week and reaffirmed its positive correlation with a strengthening Chinese yuan - a very strong currency showing for the Lustrous One. [see currency charts]
[full report is included below]
Here is a new gold model based on the the Japanese yen (USD/JPY), 10-year real rates and the Chinese yuan (USD/CNY). It demonstrates good accuracy over a three-month period. The estimation error is less than 1% and explains all but 7% of the variance in gold price (in statistical terms R-squared = 0.924 which is quite good). This suggests gold is transitioning from a pure safe-haven play to more currency-like behavior with a strong correlation with the yuan:
(click on chart for larger image)
This mornings' price action:
Comex gold (4/19 contract) $1,331.5 per ounce,
Comex silver (3/19 contract) $15.860 per ounce
Comex copper (3/19 contract) $2.9360 per pound
Have a good weekend!
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)
Elephant Dance, Barrick & Newmont
On the corporate front, Barrick Gold (GOLD) acknowledged it has reviewed the possibility of a merger with Newmont Mining (NEM) in an all-stock transaction. You may remember Barrick and Newmont came close to merging before but talks in 2014 broke down. The two giant miners have also discussed a joint venture for their Nevada operations.The chief executives of these two giants and Newcrest Mining (OTCPK:NCMGY), a potential partner in a merger deal, will all be in Florida next week for a BMO Capital Markets mining conference. Hmm....
McEwen Mining Reports
Yesterday released their report for 2018:
McEwen Mining Reports 2018 Full Year and Q4 Results (Press release, 2/21/2019)
TORONTO, Feb. 21, 2019 (GLOBE NEWSWIRE) -- McEwen Mining Inc. (NYSE: MUX) (TSX: MUX) today reported fourth quarter and full year results for the period ended December 31, 2018. For the year, McEwen Mining achieved record production of 175,640 gold equivalent ounces(1) (“GEOs”), at cash costs of $817(2) per GEO and all-in sustaining costs (“AISC”) of $1,002 per GEO. Our 2019 production guidance is 210,000 GEOs, a 20% increase over 2018 production, at average cash costs and AISC per GEO of $877 and $1,034, respectively.
During 2018, we invested heavily in areas that we believe will enhance our future growth and profitability. We invested $35 million in exploration, $66 million in construction at the Gold Bar Mine in Nevada, and $10 million to advance our Fenix and Los Azules projects. As a result we are reporting a consolidated net loss for 2018 of $45 million, or $0.13 per share.
At December 31, 2018 we had cash and liquid assets of $38 million, including cash and restricted cash of $31 million. In August 2018 we raised $50 million in debt to fund construction of the Gold Bar Mine. We decided to debt finance a portion of the required capital rather than issuing equity because we strongly believed that higher gold and silver prices were close at hand, and that our share price should improve as a result.
McEwen stock (MUX) is above the $2-level at $2.01 per share.
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 more momentum at 1.89%. 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 now 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 these columns are updated in this report.
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 very bullishly trading up from last Friday at $2.9360 per pound ($6,473 per tonne), now only 10.9% below the December 2017 high. Maintaining prices above $6,000 per tonne is a key benchmark to price recovery.
Improving global growth had kept the red metal above the key $3 per pound-level in 2017. Initial trade war fears in 2018 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. However, copper is now technically only in correction territory (i.e. 10% down) given recent optimism about a U.S./China trade deal this spring.
Total copper stored in LME and Nymex warehouses is 0.204 million tonnes and is more than one-half below the 0.5 million tonne mark of early-2018. The Nymex warehouse tonnage is behind the LME and now considerably below the 100,000 tonne mark.
LME inventories are falling again after January gains:
It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 139,500 versus Nymex 65,119 tonnes):
My Input to Kitco News
Next Week target gold price $1,340 per ounce. Target silver price $15.96 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
Gold continues to show good resilience as market sentiment improves and global stock markets make gains with increasing optimism regarding U.S./China negotiations. Notably, the yellow metal made a dash at the $1,350-level Wednesday, retreated to this week's low yesterday at $1,323.3 per ounce (Comex, 4/19) only to find itself back in the middle of the range trading around $1,330 this morning.
What's up?
Even with currents of optimism flowing, the broader view of declining global growth keeps safe haven plays like gold in gear. This is allied by a whiff of commodity inflation with higher oil prices and copper just below the key $3 per pound level - the broader Bloomberg Commodity Index (BCOM) is once again above 170, a high for 2019*. Inflation expectations are also picking up keeping 10-year real rates suppressed below 1%**. This provides an improving environment for gold investors.
Gold also outpaced major currencies euro and yen this week and reaffirmed its positive correlation with a strengthening Chinese yuan - a very strong currency showing for the Lustrous One.
I believe we remain on a push-pull path to the $1,380-level by spring flowers. Next week should show further progress with a target price of $1,340 per ounce with silver following at $15.96 per ounce.
* BCOM 159.72 (12/31/2018), currently 171.58
** currently inflation expectations are 1.89% compared to the January bottom of 1.68% (1/13/2019), source: FRED; 10-year real rate = 0.75% (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 strengthening again.
The yuan stayed below 7.0 USD/CNY for 2018, starting stronger and then followed by a weakening trend. It has re-strengthened in 2019. The yuan is currently at 6.7149 USD/CNY but with still 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 low 0.35%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.54% & 0.53% respectively; Comex gold 1-month volatility is elevated at 1.12%.
Weekly Summary February 22, 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 by 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 17 & September 27, 2018) :
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 125.42 suggesting continued 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 0.4782 and below the recent high of 0.5409 set at the close December 21, 2018. Importantly, the ratio had bullishly broken the upper rail (dotted green line) of the downward trending channel but is now falling back to that boundary. Falling below would be a bearish signal for gold.
Cheers,
Colonel Possum & Mariana
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