Friday, March 01, 2019 AM
Next Week Target Gold Price: $1,310 per ounce, Target Silver Price: $15.48 per ounce.
High/Low range: $1,338/$1,298 per ounce
My 2019 Beer Bet: Gold will rise above $1,380 per ounce by May Day 2019
Morning Miners!
Even with all the scary headlines lately, copper continues to rally. Early this morning Comex copper came within a whisker of the elusive $3 per pound-level touching $2.977 or $6,563 per tonne. The metric level of $6,500 is considered a bullish plateau by some experts. Bottom of the shaft to sunlight prices have soared a stunning 17% since January.
Is Dr. Copper is seeing something on the horizon? A favorable U.S./China trade outcome this month? Total warehouse inventories have fallen for months (see below), any pickup in global demand sets the stage for higher prices in the supply/demand equation. Just a few years ago, prices rarely fell $3 per pound - boy, do I miss the Commodity Super Cycle!
The Lustrous One wears less rosy global glasses. Gold has scored higher lows since August 2018. By fall, it accelerated even higher on safe haven demand. After reaching a 10-month peak in February, morning prices briefly dipped below $1,300 support (Comex gold $1,299.4 at 8:00 a.m. Eureka time). Comex was $1,308.6 when I did my earlier morning analysis. Let's see where the yellow metal closes.
Is the ole Colonel worried...?
Kitco News Editor Allen Sykora carried my thoughts today in his Weekly Gold Survey :
Richard Baker, editor of the Eureka Miner Report, also looks for the metal to recover.
“Tides ebb and flow,” Baker said. “I continue to maintain that the yellow metal will break $1,380 before May Day. Geopolitical tensions -- including the Indo-Pakistani conflict, failed U.S.-North Korea Summit, Brexit deadline and U.S.-China trade negotiations -- create enough uncertainty to keep the safe-haven waters flowing."
“Importantly, the environment for higher prices is still favorable. Inflation expectations are creeping up even though the 10-year Treasury yields are rising. This keeps real rates below 1%. Given low opportunity cost and negative interest rates in major economies outside the U.S., there are few obstacles to prevent a flood tide to higher gold prices given one or more geopolitical shocks.”
My full Kitco report is included below.
Don't worry be happy.
Here is a gold model introduced several weeks ago 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 10% of the variance in gold price (in statistical terms R-squared = 0.900 which is still quite good). This suggests gold has transitioned 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) $1,308.6 per ounce,
Comex silver (5/19 contract) $15.465 per ounce
Comex copper (5/19 contract) $2.9645 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%. This Wednesday expectations are picking up more momentum at 1.93%. 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 continues its bullis advance trading up from last Friday at $2.9645 per pound ($6,536 per tonne), now only 10.0% 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. 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 0.188 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 continue to fall after January gains:
It is instructive to keep our eyes on the Nymex inventories which are also still falling (LME 130,925 versus Nymex 57,629 tonnes):
My Input to Kitco News
Next Week target gold price $1,320 per ounce. Target silver price $15.60 per ounce.
Here is my input to the Kitco News Weekly Gold Report:
Gold certainly experienced an ebb tide this week. It fell in dollar value nearly 2% and in relative value to major currencies, key commodities and domestic equities. This morning Comex gold came very close to breaking the key psychological $1,300-level dipping to $1,305.4 per ounce (4/19 contract).
Tides ebb and flow. I continue to maintain that the yellow metal will break $1,380 before May Day. Geo-political tensions including the Indo-Pakistani conflict, failed U.S./North Korea Summit, Brexit deadline and U.S./China trade negotiations create enough uncertainty to keep the safe-haven waters flowing.
Importantly, the environment for higher prices is still favorable. Inflation expectations are creeping up even though the 10-year treasury yields are rising. This keeps real rates below 1%*. Given low opportunity cost and negative interest rates in major economies outside the U.S., there are few obstacles to prevent a flood tide to higher gold prices given one or more geo-political shocks.
My model shows a statistical range for gold prices of $1,298 to $1,338 per ounce next week. My target gold price is $1,310 with silver following at $15.48 per ounce.
*Currently inflation expectations are 1.93% compared to the January bottom of 1.68% (1/13/2019), source: FRED; 10-year real rate = 0.78%
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 6.7066 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 0.47% & 0.62% respectively; Comex gold 1-month volatility is 0.75%.
Weekly Summary March 01, 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 has stalled for now after 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 127.47 suggesting a pause 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 0.4662 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 but is now bearishly falling back below that boundary.
Cheers,
Colonel Possum & Mariana
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