The Eureka Miner: Gold $1,594; Wuhan Willies Shudder Markets

Willow Creek Ranch

Eureka County, Nevada (2013)

Friday, January 31, 2020 AM

Follow the ole Colonel on twitter @Eurekaminer

Next Week Target Gold Price: $1,600 per ounce, Target Silver Price: $18.03 per ounce.

My latest Kitco News commentary: Leading indicator for U.S./China trade - copper, gold & yuan (1/13/2020) [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!

The Wuhan willies shuddered global markets this week with more than 10,000 reported coronavirus cases in China and 200 deaths. The World Health Organization has declared a Global Health Emergency.

Comex April gold popped to $1,593.8 per ounce this morning as March copper missed a trip below the $2.5-level by a whisker. Gold miners are about the only folks faring well in this contagion of market fear. Expect much of the same until there is some sign of deceleration in infection rates. This too shall pass.

I cannot overstate the potential harm the coronavirus can do to the world economy. China's growth in the first quarter of 2020 could fall to a meager 2%. Estimates were 6% before the outbreak (already a bleak number by some economist's estimates). China accounts for 20% of the world output so this is potentially a big hit to global growth and that affects metal prices.

I've been actively tweeting market news/events during the week so please follow me at @Eurekaminer. Please also checkout how the declining copper-gold ratio correlates with the latest interest rate downturn (see below).

My thoughts on gold, silver & copper this morning as input to the Kitco News Weekly Gold Survey:

It's all about the Wuhan coronavirus - gold up, everything else down. The now-announced Global Health Emergency has had a chilling effect on financial markets this week with the yellow metal gaining value on equities, key commodities and major currencies. The broader Bloomberg commodity Index (BCOMTR:IND) fell below 160 this morning after enjoying pre-virus 170+ levels since mid-December [please see Weekly Summary Charts below].

Even if the virus is mostly contained in China, it will have a devastating impact on their economy and demand for industrial metals. For example, the copper-to-gold price ratio has soared to 630 pounds per ounce, even above the August-September levels when the U.S./China trade anxiety peaked.* U.S 10-year Treasury yields have plummeted in inverse relation to the copper-gold ratio rising. U.S. inflation expectations are also falling causing 10-year real rates to go marginally negative - a very bullish environment for a non-interest earning asset like gold.

Lastly, gold which has struggled for weeks to regain value relative to record-breaking stock markets, is now safely above trend relative to the benchmark S&P 500. This longer-term trend of higher-lows was established October 2018. Up and away.

I believe it likely Comex gold will see $1,600 next week . Silver, which has lost some traction with its lustrous cousin, should follow higher to $18.03 per ounce [revised upwards after pop to $1,593.8]

* Gold-to-copper price ratio Sept. 3, 2020 = 616 pounds per ounce

** 10-year U.S. real rate -0.11%; 10-year bonds: German Bund -0.43%, France -0.18% and Japan -0.08%;

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 slipped below $18 per ounce territory this week showing weakness relative to gold.

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 88.72, silver is historically 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 fell again this week, currently an unattractive 0.88 (i.e. on average the daily % rise or fall of silver price is beta times the % change in gold price).

(click on image for larger size)

Gold-to-Silver Ratio

Note that this week, the GSR is near 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.

Interest Rates and the Copper-Gold Ratio

The Wuhan-driven Friday close illustrates how a U.S. 10-year yield model based on copper-gold ratio has become very accurate (4.8 basis point error, click on chart for larger image).

10-year U.S. Treasury Based on the Copper-to-Gold Ratio

I have written extensively about this unique relationship since 2017 as summarized in the last section below. An explanation for how it works can be found in this Kitco column:

Gundlach Indicator: treasury yield and copper-gold ratio plummet (9/03/2019, Kitco News)

The current 3-month 10-year yield model shows a statistical lower bound at 1.468% which is within the Sept. 3, 2019 range (1.429-1.483). This was the last bottom in yield - yields go lower from here, pardner.

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. Expectations are retreating but still above 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 1.64% as of Thursday 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 Monitor

Here's a chart to monitor 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 0.4734 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 was challenged but now appears intact (red arrow & circle).

Six Things to Watch in 2020

The ole Colonel's beer bet (won on an intraday basis Tuesday, January 7th!):

Gold will break [a closing basis] $1,600 on per ounce before the 4th of July 2020

Let's keep the bet alive by looking at closing instead of intraday prices - what a sport!

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. [Update: Wuhan Coronavirus has pushed copper below $6,000 per tonne].
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. [Update: Wuhan Coronavirus appears to have reversed the trend higher].
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 entered 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold. [Update: Wuhan Coronavirus has put the AUSP above trend, a bullish sign for gold].

Predictions aside, 2020 will no doubt be an exciting year in the markets. Get ready for a roller-coaster ride, pardner. I remain bullish gold!

The Colonel's Latest Kitco News Commentaries

Please checkout my latest Kitco News columns on the stunning relationship of copper and gold prices with interest rates:

Leading indicator for U.S./China trade - copper, gold & yuan (1/13/2020, Kitco News)

Is Jeffrey Gundlach right about copper, gold & interest rates? (12/23/2020, Kitco News)

Gundlach indicator: stable copper-gold means low yield volatility (11/11/2019, Kitco News)

Gundlach indicator: copper, gold & treasury yields at a tipping point (10/14/2019)

Gundlach Indicator: treasury yield and copper-gold ratio plummet (9/03/2019, Kitco News)

Robust Revival of Gundlach's 10-yr Treasury Relation with the Copper-Gold Ratio (6/17/2019, Kitco News)

Here is my China Indicator updated through this morning (see above 1/13/2020 Kitco column). A low number is good. A bottom occurred after the signing of the Phase I deal of 0.3011. This AM the indicator sits at 1.6699 propelled higher by the Wuhan Coronavirus (click on chart for larger size).