Friday, March 08, 2019 AM
Next Week Target Gold Price: $1,310 per ounce, Target Silver Price: $15.43 per ounce.
High/Low range: $1,330/$1,280 per ounce
My 2019 Beer Bet: Gold will rise above $1,380 per ounce by May Day 2019
Morning Miners!
The good, the bad and the ugly.
I've started this report with those words before and this week warrants a repeat. Enjoying life in the $1,300+ neighborhood for sometime, Comex gold dipped to $1,280.8 per ounce Thursday. Comex copper, after nearly touching $3 per pound earlier this month, fell below $6,500 per tonne ($2.95 per pound) - a key plateau for bullish recovery.
Fortunately, the yellow metal bounced to $1,301.3 after the monthly jobs report release and is presently trading at $1,299.0 per ounce. The red metal remains in the doldrums at $2.8850 per pound.
Here's how I described the situation to Kitco News this morning:
The good and the bad this week are reflected in this morning's February jobs report; we find ugly far from our shores. Low headline unemployment and strong wage growth suggest a vibrant domestic economy. The bad part is a big miss on jobs added (by separate survey) supporting notions that the economy is indeed slowing. China and Europe both face ugly economic numbers underlining a global slowdown in progress. China's much worst-than-expected drop in exports coupled with an official downward revision of GDP show the impact of the U.S./China trade tensions. A similar downgrade of euro zone GDP, ECB Draghi's pessimistic outlook and re-introduction of stimulus measures tumbled the euro currency.
How does gold react? On a weekly basis the yellow metal has not moved much at all. However, response to Draghi tested the $1,280-level yesterday and this morning's mixed report returned gold to trade near $1,300 per ounce. Importantly, gold made solid value gains relative to equities and commodities for the week [see weekly Summary Chart below]. This is a bullish for more gains next week as 10-year real rates still remain below 1%.
My target gold price is $1,310 with silver following at $15.43 per ounce.
Eureka Mining Report's Baker: The Good, Bad And Ugly (Allen Sykora, Kitco News, 03-09-2019)
In fairness, the mixed jobs report may have some funnies due to severe weather in February and the lingering effects of the government shutdown. Only 20,000 jobs were added compared to an expectation of 180,000 although headline unemployment is 3.8% (by separate survey).
Encouragingly, there were upward revisions to both the December and January numbers resulting in a healthy 3-month average of 186,000 jobs per month. Average hourly earnings also popped 0.4% suggesting robust wage growth. Participation rate held at 63.2% with more women returning to the workforce.
On the international scene, China exports plunged a startling 20.7% and the official GDP target was lowered from 6.5% to 6.0% (partially explaining the slump in copper prices). European Central Bank Cheif Mario Draghi sees "a period of continued weakness and pervasive uncertainty " in the euro zone. He re-introduced stimulus for banks and lowered GDP estimates from 1.7% to 1.1%.
The good, the bad and the ugly.
When a Good Gold Model Goes Bad
The breakdown of a good gold model tells us something fundamental has changed in the drivers of gold price. The model below, introduced in February, is based on the the Japanese yen (USD/JPY), 10-year real rates and the Chinese yuan (USD/CNY). It demonstrated good accuracy over a three-month period. The estimation error was less than 1% and the model explained all but 10% of the variance in gold price (in statistical terms R-squared = 0.900). This week that model broke down rather dramatically. I am presently sorting through the pieces to determine what new forces are in play. Stay tuned.
This mornings' price action:
Comex gold (4/19 contract) $1,299.0 per ounce,
Comex silver (5/19 contract) $15.295 per ounce
Comex copper (5/19 contract) $2.8850 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)
Inflation Watch
Inflation expectations made a high April 23, 2018 above trend lines of higher lows (dotted lines, click on chart for larger size). Those trend lines were broken dramatically to the downside late last year but now recovery appears to be underway 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%. 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). The Wednesday expectations are maintaining upward momentum at 1.91%.
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 headed back downhill this week. Presently trading at $2.8850 per pound ($6,360 per tonne), the red metals is now 12.5% below the December 2017 high. Maintaining prices above $6,000 per tonne is a key benchmark to price recovery; above $6,500 is bullish.
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 had revived on optimism about a March resolution of the U.S./China conflict. A stunning drop in February exports and downward revision of the official GDP target weighed on prices this week.
Total copper stored in LME and Nymex warehouses is 0.174 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 75,000 tonne mark.
LME inventories continue to fall after January gains:
It is instructive to keep our eyes on the Nymex inventories which are also still falling (LME 120,075 versus Nymex 54,178 tonnes):
My Input to Kitco News
Next Week target gold price $1,310 per ounce. Target silver price $15.43 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
The good, the bad & the ugly.
The good and the bad this week are reflected in this morning's February jobs report; we find ugly far from our shores. Low headline unemployment and strong wage growth suggest a vibrant domestic economy. The bad part is a big miss on jobs added (by separate survey) supporting notions that the economy is indeed slowing. China and Europe both face ugly economic numbers underlining a global slowdown in progress. China's much worst-than-expected drop in exports coupled with an official downward revision of GDP show the impact of the U.S./China trade tensions. A similar downgrade of euro zone GDP, ECB Draghi's pessimistic outlook and re-introduction of stimulus measures tumbled the euro currency.
How does gold react? On a weekly basis the yellow metal has not moved much at all. However, response to Draghi tested the $1,280-level yesterday and this morning's mixed report returned gold to trade near $1,300 per ounce. Importantly, gold made solid value gains relative to equities and commodities for the week*. This is a bullish for more gains next week as 10-year real rates still remain below 1%** [see Weekly Summary Chart]
My target gold price is $1,310 with silver following at $15.43 per ounce.
* +2.7% gain on the S&P 500 and +1.1% gain on the broader Bloomberg Commodity Index (BCOM)
** currently inflation expectations are 1.91% compared to the January bottom of 1.68% (1/13/2019), source: FRED; 10-year real rate = 0.74%
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 6.7200 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 moderate 0.47%. Something to watch compared to 1-month volatilities of euro and yen.
The euro & yen 1-month volatilites are 0.41% & 0.57% respectively; Comex gold 1-month volatility is an elevated 1.39%.
Weekly Summary March 08, 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 mixed this week following a rally from a double-bottom 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 124.65 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 0.4761 and below the high of 0.5409 set at the close December 21, 2018. Importantly, the ratio had bullishly broke the upper rail (dotted green line) of the downward trending channel, fell back below and is now testing the upper boundary again.
Cheers,
Colonel Possum & Mariana
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