The Eureka Miner: Gold $1,587 on Coronavirus Fears; Copper & Oil Take a Breather

Ancient Devonian Seabeds

Devil's Gate, Eureka County, Nevada (2015)

Friday, February 14, 2020 AM

Follow the ole Colonel on twitter @Eurekaminer

Next Week Target Gold Price: $1,590 per ounce, Target Silver Price: $17.85 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!

Pilots are trained to trust their instruments when they fly into zero-visibility conditions. I feel the same can be applied to metal prices in the current coronavirus environment. Nobody can predict with certainty what the impact to gold and copper will be as this situation unfolds. My instruments are charts derived from market data and offer some good news in the short-term (see below). It looks like we turned the corner Tuesday although copper prices remain wobbly. At least we're back above $5,700 per tonne. Gold loves uncertainty so there is a good chance prices will move back up.

When I did my morning analysis, Comex April gold was $1,583.2 per ounce after touching $1,586.7. May Copper is presently trading at $2.6070 per pound.

I believe we haven't felt the full impact the virus will have on commodities. Bloomberg News reports this AM, "The number of infections from the virus in China rose to 63,851 with the death toll standing at 1,380 after the latter was revised to remove some double counting." About the only good statistic is the ratio of deaths to total cases. It continues to hold steady at 2% compared to 10% for the 2003 SARS outbreak - another variant of coronavirus.

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

Is it a pandemic? Nobody knows for sure, coronavirus infections are being recounted to the upside in China and the death toll continues to rise. This is an economic and viral shock to the world that is hard to quantify. That uncertainty alone underpins a range for safe-haven gold: a solid floor around $1,500 per ounce and the mercurial $1,600-level above - at least for the near-term. If China's growth falls to just several percent and supply chains are disrupted for months, the upper level for gold could be much higher, perhaps $1,800.

I look to copper and oil for directional clues. For the short-term, it appears Tuesday (2/11) was a reversal to the upside for these two embattled commodities. Both are persistently and negatively correlated with gold*, so copper and oil regaining value put pressure on gold. Domestic stocks also remain near record levels creating additional headwinds for safe-havens [see Chart to Watch below].

Although gold prices are up for the week, the yellow metal lost value to both key-commodities and equities. All this could change with a headline [see Weekly Summary Charts].

Importantly, the gold-to-copper ratio remains historically elevated** and benchmark U.S 10-year Treasury yields have fallen in inverse relation to this ratio rising. U.S. inflation expectations are also trending lower causing 10-year real rates to go marginally negative*** - a very bullish environment for a non-interest earning asset like gold I believe we haven't seen the worse from the coronavirus.

It is likely Comex gold will regroup to $1,590 next week with its eyes on breaking the $1,600-level. Silver, which has lost traction with its lustrous cousin, should follow higher to $17.85 per ounce.

* Correlations are persistent if the sign of short-term and longer-term correlations is the same - in this analysis, 1-month & 3-month correlations

** Gold-to-copper price ratio Sept. 3, 2020 = 616 pounds per ounce, today 607

*** 10-year U.S. real rate -0.09%; 10-year bonds: German Bund -0.41%, France -0.17% and Japan -0.04%;

This is what persistently negative correlations of copper and oil with gold look like:

Copper & Oil Correlations with Gold

Using the title to Clint Eastwood's most memorable spaghetti western, we moved from "The Good" quadrant of positive persistence, transitioned to the "The Bad" quadrant of mixed correlations and are now deep within "The Ugly" quadrant of negative persistence - all in less than a month. Not a happy in commodity land. To learn more, checkout this Kitco column:

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

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 1.7292 falling away from the coronavirus peak of 1.8399 set February 11 (click on chart for larger size).

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 is below $18 per ounce territory this week showing continued 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 89.10, 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 0.73 (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.

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 1.67% 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 0.4754 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 continues to be challenged (red arrow & circle).

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!

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). 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 near trend].