Eureka, Nevada
(click on map for larger image, 2014)
Friday, February 15, 2019 AM
Friday, February 15, 2019 AM
Next Week Target Gold Price: $1,315 per ounce, Target Silver Price: $15.56 per ounce.
High/Low range: $1,332/$1,295 per ounce
Old Timer Quiz: How did the Jackson Mine become a key milestone in Eureka history?
My 2019 Beer Bet: Gold will rise above $1,380 per ounce before May Day 2019
Morning Miners!
Another good week for gold. Like the Energizer Bunny, the yellow metal "keeps going" in 2019. As I have said before, it will be a push-pull to $1,380 per ounce before spring flowers and we're off to a good start.
This morning Comex gold touched $1,323.1 per ounce before pulling back to trade around $1,320 and will likely consolidate to the $1,315-level next week. That's the push and pull. Be patient, we're heading higher soon on the back of a 2.5-month uptrend.
Kitco News Allen Sykora included my thoughts in his Weekly Gold Survey:
Richard Baker is one of the analysts who sees a temporary pullback in gold, calling for consolidation of the recent gains. He pointed out that the metal had a good week despite a strong dollar and gains in U.S. equities...
He said 10-year inflation expectations are rising again from the early-January bottom, stabilizing real rates below [1%].
“This is a bullish tailwind for gold going forward,” Baker said. “However, there is probably some consolidation ahead next week before a move higher to the retake the January high ($1,331.10).”
My complete Kitco News 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 = 0.927 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) $1,320.0 per ounce,
Comex silver (3/19 contract) $15.615 per ounce
Comex copper (3/19 contract) $2.6770 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)
McEwen Mining Gold Bar Mine Update
Here is the latest good news on the McEwen Mining Gold Bar Mine:
McEwen Mining Provides Update on Gold Bar Mine Start-Up (Press Release, February 5, 2019)
TORONTO, Feb. 05, 2019 (GLOBE NEWSWIRE) -- McEwen Mining Inc. (NYSE: MUX) (TSX: MUX) is pleased to report that construction of the Gold Bar Mine in Nevada’s prolific Battle Mountain-Cortez Trend is nearing completion, just 14 months after breaking ground in November 2017.
The Mine is on schedule for inaugural gold production in late February 2019. Commercial production will follow when the Mine’s systems reach a steady state, which is expected by the end of Q1. The project is tracking on our original capital cost estimate of $81.4 million.
150,000 tons of ore have been placed on the heap leach pad since starting in December 2018. A few weeks ago leaching was initiated and gold is being dissolved by the cyanide solution at the desired rate. We estimate that the Gold Bar Mine will produce 55,000 ounces (oz) gold in 2019 at an all-in cost of approximately US$975 per ounce.
December and January were challenging months on site with heavy snow and cold temperatures delaying some work. Remaining activities to complete the process plant include electrical work, instrumentation installation, and commissioning of the gold refinery circuit. We would like to thank all our employees and subcontractors for their dedication to the job at hand whatever the conditions.
2018 exploration drilling has extended the estimated mine life to 7.4 years.
The future addition of the Gold Bar South resource to the mine plan should further extend the mine life by a minimum of one year. Our 2019 exploration budget on the Gold Bar property is $4.4 million. Exploration drilling will target both near surface and deep Carlin-type mineralization.
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 steam at 1.86%. 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 bullishly trading up from last Friday at $2.6770 per pound ($5.901 per tonne), now 18.8% 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. Copper is technically moving back toward territory (i.e. down 20% or more) even with recent 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 in January 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 leveling off again after January gains:
It is instructive to keep our eyes on the Nymex inventories which are still falling (LME 147,900 versus Nymex 72,417 tonnes):
My Input to Kitco News
Next Week target gold price $1,315 per ounce. Target silver price $15.56 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
Gold had a good week despite a strong U.S. dollar and rising domestic stock markets. Earlier this month, the U.S. dollar index [DXY] bounced off its 200-day average like a rubber ball* as the U.S. economy signaled strength relative to the rest of the world and on optimism about U.S./China trade negotiations.
Gold remains resilient transitioning from a purely safe haven play earlier this year to more currency-like behavior. It has regained a strong correlation to the Chinese yuan and gained value on the week relative to both the Japanese yen and euro.
10-year inflation expectations are on the rise again from their early-January bottom** stabilizing real rates nicely below 1%***. This is a bullish tailwind for gold going forward. However, there is probably some consolidation ahead next week before a move higher to the retake the January high ($1,331.1).
My gold target is $1,315 per ounce with silver following at $15.56 per ounce.
My latest 3-month gold model based on the Chinese yuan, Japanese yen and 10-year real rates indicates an upper bound of $1,332 and lower bound of $1,295. The expected mean price is $1,313.[see plot in headline discussion]
* Today DXY = 97.08 versus 200-day moving average 95.86
** currently inflation expectations are 1.86% compared to the January bottom of 1.68% (1/13/2019), source: FRED
*** 10-year real rate = 0.80%, 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. It has re-strengthened in 2019. The yuan is currently at 6.7644 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 0.38%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.53% & 0.50% respectively; Comex gold 1-month volatility is elevated at 1.14%.
Weekly Summary February 15, 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 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 124.6 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 0.4767 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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