The Eureka Miner: Gold Rockets to $1,613, Now $1,560; Missiles, Jobs & China

Talking Silver with Johnny Brown (2012, silver was $33+)

Eureka, Nevada

Friday, January 10, 2020 AM

Follow the ole Colonel on twitter @Eurekaminer

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

Next Week Target Gold Price: $1,525 per ounce, Target Silver Price: $17.67 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 roller coaster ride continues. The U.S. and Iran step back from the brink of war, the U.S./China Phase I deal is still on track for signing next week and today's monthly jobs reports disappoints but remains solid. Other than stocks breaking new records, markets have returned to about where they were last Friday. Go figure.

Make sure you check my twitter feed for updates between reports (@Eurekaminer). I was busy as a bird tweeting this week!

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

What a crazy week. Gold soars above $1,600 per ounce as Iranian missiles fly towards U.S. forces in Iraq then plunges $72 after cooler heads prevail and now trades only a dollar or two from where it closed last Friday.* [Note: gold did move up a bit after the Pompeo/Mnuchin Iran sanctions press conference, now around $1,560-level].China and copper rolled through the Middle East drama unfazed with the later trading with very low currency-like volatility - a penny or two per pound from a week ago.

There appears to be a steady-state component to commodities currently superimposed by transient spikes in safe-haven gold and conflict-sensitive oil. This is supported by a strong one- and three-month correlation with the U.S. Dollar Index for both gold and the Bloomberg Commodity Index (BCOM). Compared to record-breaking domestic stocks, the yellow metal is just barely holding its value relative to an uptrend of higher-lows established since early-October 2018, a key trend to monitor [see Chart to Watch below].

With this backdrop, unless there is another geo-political shock, it is likely gold will remain above the $1,500-level next week but not by much. I think equilibrium is somewhere around $1,525 per ounce with silver following at $17.67 per ounce.

From an interest rate perspective, even with a trend higher in global yields, a bullish environment remains for a non-interest earning asset like gold. Negative or near-zero interest rates for major countries and very low real rates in the U.S. are still in place.**

* Comex February gold high/low range $1,613.3 (1/8), $1,541.0 (1/9)

** 10-year bonds: German Bund -0.19%, France +0.05% and Japan -0.01%; 10-year U.S. real rate +0.07%

If you are wondering why oil didn't reach for the sky this week here is is a terrific analysis by commodity journalist Debbie Carlson:

Why Iran crisis is unlikely to hit US consumers hard at the gas pumps (Debbie Carlson, The Guardian, 1/8/2020)

The monthly Employment Situation Summary reported an addition of 145,000 jobs (160,00 expected) in December with a headline unemployment rate unchanged at 3.5%. 2.1 million jobs were added in 2019 compared to 2.7 million in 2018. Solid, pardner.

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 86.3, 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 is fell again this week, currently 1.26 (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 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 1.74% 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 0.4746 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).

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.
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 entered 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold.