The Eureka Miner: Gold $1,554 on U.S. Airstrike; Oil Pops, Stocks Drop

Friday, January 3, 2020

Gold $1,554 on U.S. Airstrike; Oil Pops, Stocks Drop

Up the Down Staircase (January 2011)

Eureka, Nevada

Friday, January 03, 2020 AM

Follow the ole Colonel on twitter @Eurekaminer

UPDATE TUESDAY EVENING (1/7/20): Comex gold touched $1,613.3 per ounce after the Iran launched more than a dozen ballistic missiles at U.S. forces in Iraq.

UPDATE SUNDAY EVENING (1/5/20): Brent crude oil above $70; Comex gold $1,581; Comex copper $2.79; e-mini S&P 500 futures down more than 1% at 3,222 - could be a rocky week ahead.

Next Week Target Gold Price: $1,540 per ounce, Target Silver Price: $18.02 per ounce.

My latest Kitco News commentary: Is Jeffrey Gundlach right about copper, gold & interest rates? (12/23/2019) [summary of recent commentaries given at the bottom of the blog]

An easy-to-understand overview on gold (32 slides, read explanation below each slide): History of gold and which countries have the most

Morning Miners!

Last week I said 2020 could be a market roller coaster but didn't expect the wild ride would start this soon.

Yesterday, stocks soared as the S&P 500 notched a new record (3,258.14). Then around 4:00 pm Eureka time, news hit the wires that top Iranian General Qassem Soleimani had been killed by a U.S. airstrike near the Baghdad airport. Gold and crude oil popped as S&P 500 futures dropped. Comex February gold scored a high of $1,554 per ounce in the wee hours and is trading at $1,547.8 as I write this report. Stock markets did open lower but have recovered some ground, down less than 1%. Comex copper (March) took a dive to $2.7595 per pound but then recovered to trade at $2.79. Importantly, the red metal never dipped below this report's key $6,000 per tonne-level (or $2.72 per pound, see Six Things to Watch in 2020 below).

[Update: Comex February gold touched $1,556.6 per ounce later in the day, closed at $1,552.4]

We've been here before and it is impossible to gauge the long- or even near-term effect this strike will have on the markets. The good news is that the U.S. is much less dependent on foreign oil so the impact of Middle East unrest is muted to some degree. In 2011, such an event would have pushed oil towards or above $100 per barrel. Brent crude, the global crude benchmark, failed to break $70 and is now trading only 1% above last Friday's price; WTI crude is up 3% (see Weekly Summary below). Going forward, much depends on the extent and nature of Iranian retaliation for Soleimani's death followed by possible further U.S. action.

The positive for gold miners is that the yellow metal has been on a upwards trend of higher-lows since mid-November with solid gains in the last several weeks. It also seems to be holding its own relative to stocks (see Chart to Watch). So far, so good.

The next planned market event of major significance is the monthly jobs report delayed until next Friday due to the closeness of the New Year's holiday. Economic activity in the manufacturing sector did contract in December but the overall economy grew for the 128th consecutive month as reported in today's Manufacturing ISM Report On Business®.

Weekly Summary

Here is a weekly summary chart of gold and my 16 favorite market variables. They are grouped in categories "Commodities", "Interest Rates", "Indexes" and "Currencies" of 4 variables each. Over time, each variable has played some part in the gold story. It is prudent to monitor all 16 to understand the key price drivers that are currently active for the yellow metal. Importantly, this is not a unique collection of variables but one that works well for the ole Colonel

Because The Eureka Miner is a morning report, Friday AM prices are compared with the closing prices of the previous week (click on charts for larger size):

This weekly chart of comparative value tracks the value of gold relative to key currencies, commodities and indexes :

Silver Watch

Comex silver is in $18 per ounce territory this week.

Please check this out if you get the silver bug:

How to Invest in Silver (Debbie Carlson, U.S. News & World Report, August 1, 2019)

How to smartly buy gold and silver:

How to Mine Physical Precious Metals for an IRA (Debbie Carlson, Barrons, Sept. 8, 2019)

The gold-to-silver ratio (GSR) set a new high July 11 at 91.3 ounce per ounce - a trend down from this top is bullish for silver if the Lustrous One rallies.

At 85.47, silver is historically very, very cheap relative to gold!

The 10-year average GSR is much lower at 67.7 ounce per ounce.

The 3-month beta with gold is falling this week but still a reasonable 1.67 (i.e. on average the daily % rise or fall of silver price is beta times that of gold).

(click on image for larger size)

Gold-to-Silver Ratio

Note that this week, the GSR is right at the long-term trend line of higher-lows established in April 2011 when silver flirted with $50 per ounce. A GSR falling below this trend is bullish silver.

Historical note:

In the past, when gold and silver were legal tender (see gold overview link below headline photo), it was important to set a value relationship between them. In 1792, the U.S. fixed its price at 15:1. This means that 1 troy ounce of gold was worth 15 troy ounces of silver. Over the years, as this ratio has changed, precious metal investors have used it as a signal of when to buy.

Stay tuned.

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. Expectations are on the rise again from the October, 2019 low.

10-year Inflation Expectations

Note: In the above chart inflation expectations peaked April 23, 2018 at 2.18%. May 29 broke a trend line of higher-lows. This week, expectations are 1.77% as of Tuesday up from the October 3 low of 1.48%.

Many believe, including the ole Colonel, that gold price is more sensitive to inflation expectations than other measure of inflation. My January 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)

Old Glory

Eureka, Nevada

Chart to Watch

Here's a chart to watch for 2020 (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 reversed into a downward channel bottoming again October 1, 2017 (0.4063). Currently this AM the AUSP is at 0.4781 and below the high of 0.5409 set at the close December 21, 2018. Importantly, the ratio has left the downward trending channel with a new trend of higher-lows starting with the October, 2018 low. That trend is now challenged (red arrow & circle) but moving in the right direction this Friday.

Six Things to Watch in 2020

The ole Colonel's beer bet (might be an easy one given the way the year has started!):

Gold will break $1,600 per ounce before the 4th of July 2020

UPDATE TUESDAY EVENING (1/7/20): Comex gold touched $1,613.3 per ounce after the Iran launched more than a dozen ballistic missiles at U.S. forces in Iraq.

My top six things to watch for 2020:

Copper prices - I'd like to see copper prices push us above $6,500 per tonne ($2.95 per pound). A fall below the $6,000-level ($2.72) would be a bad sign - for example, U.S./China trade Phase I in trouble or escalating geo-political unrest.
Chinese yuan - strengthening below 7 USDCNY is a good sign that their economy and trade are on an improving track (Weekly Summary). Sustained weakening above the 7-level is a red flag.
U.S. dollar - will it remain strong or begin a period of decline? Foreign demand for Treasury debt has kept the dollar strong but rising U.S. deficits and countries trying to move away from dollar dependence (e.g., China, Russia) are countervailing forces not to be ignored. The U.S. Dollar Index (DXY) made its high September 30 this year and has been in a downtrend of lower-lows since (99.38 September high). This reports tracks the Invesco DB US Dollar Index Bullish Fund (UUP) (27.01 September high, see Weekly Summary below for latest price). Finally, overseas interest in Treasurys has been fueled by negative interest rates abroad. This report monitors the German 10-year bund (Weekly Summary) as a benchmark for foreign Treasury demand.
Interest Rates - there is an almost uncanny relationship between the yield on the benchmark U.S. 10-year Treasury and the copper-to-gold ratio (CGR, Weekly Summary). I've written about this extensively since 2017 ( see The Colonel's Latest Kitco News Commentaries below). Bottom line, a rising CGR signals higher interest rates for 2020.
Real rates - The 10-year inflation adjusted Treasury yield, or real rate, is the difference between the nominal yield and inflation expectations (aka 10-year "break-even" rate). Since gold is a non-interest bearing assets it performs best when real rates are near zero or negative. This report tracks real rates (Weekly Summary) and inflation expectations (Inflation Watch). Since gold is often considered an inflation hedge it is prudent to track both. In 2020, inflation may pick up (gold bullish) but if interest rates rise faster, an increasing real rate dampens interest in in the yellow metal (gold bearish).
Gold-to-S&P 500 ratio (AUSP) - Gold's relationship with equities is key to monitor. Gold lost value to the S&P 500 from Donald Trump's election until October of 2018. Since then it has regained value in a trend of higher-lows (see Chart to Watch below). We enter 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold.