The Eureka Miner: Gold $1,575 on Sell-Off, Don't Despair; Markets Head for the Covid-19 Bunker

Eureka Rodeo (2012)

Eureka, Nevada

Friday, February 28, 2020 AM

Follow the ole Colonel on twitter @Eurekaminer

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UPDATE (Friday closing prices): Comex April gold closed at $1,566.7; Comex May silver $16.46; Comex May copper $2.5400; The S&P 500 2,954.22 down 11.5% from last Friday's close. A rough week indeed but copper is still above $2.5

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Next Week Target Gold Price: $1,650 per ounce, Target Silver Price: $17.23 per ounce [early morning forecast before the big washout - the Colonel remains bullish gold, silver is looking interesting in $16 territory]

My latest Kitco News commentary: Copper, gold & the coronavirus (2/18/2020) [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!

As the coronavirus (covid-19) slowly makes its way to our shores, domestic and global markets plummet. No one knows how severe this epidemic will become or what impact it may have on the economies of the world. It may evolve to a pandemic or perhaps remain isolated in hot spots throughout the world. The former is becoming more likely as new cases appear in Europe beyond northern Italy and a case with mysterious lineage shows up in California. South Korea and Iran are already taking drastic measures within their borders in response to expanding outbreaks. Here is a good link for live updates (CBS News) :

Coronavirus Live Updates

More than 83,000 cases of the COVID-19 disease have now been confirmed in more than 50 countries. While about 36,000 of those people have recovered, fast-growing outbreaks in South Korea, Italy and Iran — along with the first case confirmed in Nigeria — show the battle to contain the virus is still in its early stages. Officials have worried the disease could spread widely in countries with weaker public health systems, specifically in Africa and Latin America. In the U.S., at least 63 people were being treated for COVID-19 as of Thursday, most of them evacuated from Asia. The origin of two cases, both women in California, have been impossible for doctors to trace, leading the CDC to warn the U.S. has likely seen its first case of "community spread."

You can also register with the Centers for Disease Control and Prevention (CDC) for updates by e-mail.

Investors this week took a "survival, not returns" approach to markets. Domestic stocks are in their seventh day of decline after posting all-time records last week. This is the biggest weekly decline since the 2008-2009 Financial Crisis.

Gold initially rallied to 7-year highs on a safe-haven play but lost some luster this week in a confused whirlwind of selling and low demand in China. I believe this will clear and the gold rally should resume next week.

Presently, Comex April gold is trading at $1578.7 per ounce after dropping to $1,574.6.

Here's how I explained my outlook to the Kitco News Weekly Gold Survey this morning:

Stock markets are collapsing and gold futures are down $25 per ounce this morning - what's happening? [Note: futures fell dramatically lower as I wrote this piece plumbing a low of $1,574.6 per ounce].

The brilliant rally of the lustrous metal propelled by globally spreading covid-19 became very confused this week. Profit taking, forced liquidations and low consumer demand in China likely all played a part in Comex gold retreating 2% from last Friday's April close of $1,648.8 per ounce. Given the mounting uncertainty surrounding the impact this illness will have on the U.S. economy and the world, I believe it likely that gold will recover lost ground next week to the $1,650-level on a path and to $1,800 per ounce in the weeks to come. Although the gold-to-silver ratio is hitting new highs (currently 95.7), silver should struggle back to $17.24 per ounce.

Why?

I think a more accurate picture of gold's progress comes from a comparison with the benchmark S&P 500 [please see Chart to Watch below]. From October 2018 the gold-to-S&P 500 ratio (AUSP) has been on an uptrend of higher-lows; gold is doggedly gaining value on equities. Although this trend line has been challenged for much of 2019, covid-19 caused a decisive break higher. Even with gold down this week, the AUSP is making new highs as stocks plummet*.

Gold and U.S. Treasurys will remain global safe-havens of choice in a world of increasingly negative interest rates (the German Bund hit a new negative record low this AM). In the U.S., the 10-year real rate is solidly negative sustaining a very bullish environment for a non-interest earning asset like gold.**

I believe we haven't seen the worse from covid-19 and it is likely that gold regain momentum to $1,800 in 2019.

* AUSP 0.5584 this AM; last AUSP high was 0.5409 December 21, 2018

** 10-year U.S. real rate -0.29%; 10-year bonds: German Bund -0.60%, France -0.30% and Japan -0.16%;

I answered a follow-up Kitco question about silver prices as a result of weak industrial demand. My reply:

Weak industrial demand is certainly part of the equation but I also wonder if there isn't some liquidation going on. I recall when silver went to $9 during the height of the Financial Crisis, one of the first things thrown overboard on a "sell what you can, not what you want" sentiment.

Technically silver has been losing value to gold since its race to $50 in 2011 [please see silver chart below]. This morning (and the numbers are shifting about) the gold-to-silver ratio is around 95 - a new record. I'd be tempted to add to my silver position if prices are $16 or lower. Haven't pulled the trigger yet.

Here is my China Indicator updated through this morning (see above 2/18/2020 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 1.0116 below the coronavirus peak of 1.8399 set February 11 (click on chart for larger size). Although it is headed higher again the first phase of the epidemic may be stabilizing in China - a good sign!

China 2-rho Divergence Indicator

I've been actively tweeting market news/events during the week so please follow me at @Eurekaminer. I usually tweet Sunday night on the Monday Shanghai Futures Exchange (SHFE) for a heads up on copper & gold prices in the Year of the Rat.

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 dipped below $17 per ounce this week showing weakness relative to gold (see Weekly Summaries above).

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 today of 94.99 ounce per ounce above the July 11 high of 91.3 - a trend down from this top is bullish for silver if the Lustrous One restarts its rally.

At 94.98, 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 this week, currently an unattractive 0.65 (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

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. Expectations are retreating and approaching 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 1.53% as of Thursday close now to 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 0.5425 inching above 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. This week the ratio put lots of daylight above that trend - bullish gold!

Six Things to Watch in 2020

The ole Colonel's beer bet (won on an intraday basis Tuesday, January 7th!). I have since revised it [parenthesis]:

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

We'll keep the bet alive by looking at closing instead of intraday prices - what a sport! [won on a closing basis February 18th]

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: Covid-19 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. [Chinese yuan is below 7 USDCNY again, an encouraging sign]
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: Covid-19 appears to have reversed the trend higher, 10-year Treasury is at record lows].
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). We entered 2020 with that trend higher challenged. Falling below trend would be a very bearish sign for gold. [Update: Covid-19 has put the AUSP above trend].