The Eureka Miner: Gold Below $1,500 on Dollar Surge; Pandemic Drops Cu, Ag; McEwen COVID-19 Update

Too late for preventive maintenance (Spring 2014)

Eureka, Nevada

Friday, March 20, 2020 AM

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UPDATE (Friday 3/20/20 closing prices)

Comex April gold $1,488.1 per ounce

Comex May silver $12.39 per pounce (down 34.8% from 2/24/20 high, $19.005/t-oz)

Comex may copper $2.1715 per pound (down 24.9% from 1/16/20 high, $2.8930/lb)

Nymex WTI crude oil $24.50 per barrel (down 62.0% from 1/8/2020 high, $64.39/bbl)

S&P 500 closed down 4.34% at 2,304.92. This is down 32.1 % from the all-time intraday high of 3,393.52 set just a month ago, 2/19/2020 - both feet into Bear Country.

"I cannot overstate the potential harm the coronavirus can do to the world economy." (Eureka Miner, January 31, 2020)

"WARNING: Too quiet on the copper front? Red metal at currency-like volatility!" @Eurekaminer March 4, 2020 [Comex copper has since ventured into bear country]

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Follow the ole Colonel on twitter @Eurekaminer

Next Week Target Gold Price: $1,550 per ounce, Target Silver Price: $13.10 per ounce

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!

I thought the selling pressure would clear this week but was wrong. Large scale asset liquidations continue as markets reel under the darkening shadow of the global Covid-19 pandemic.

Comex April gold fell below the key $1,500-level to plumb an intraday low of $1,450.9 per ounce Monday. Comex May silver was even more shocking to watch - $11.64 per ounce on Wednesday. Comex May copper is clearly in bear country briefly falling below $2 for a low of $1.9750 per pound yesterday. All three have recovered (see Weekly Chart below) but we can expect a lot more volatility in the coning weeks.

What's going on? There are actually some rays of light coming in the shaft.

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

Don't give up on gold.

Broad liquidations continued this week to raise U.S. dollars pushing the U.S. dollar Index (.DXY) to levels not seen since December 2016.* This put tremendous pressure on dollarized commodities including gold. However, gold soared relative to key commodities with significant value gains against major currencies and domestic equities too - a very bullish sign. For example, the gold-to-oil (WTI) ratio touched an alarming 68 barrels per ounce on Wednesday, more than 10 bbl/oz above its prior February 2016 peak. The gold-to-copper ratio scored 718 pounds per ounce the same day, more than 100 lb/oz above the peaks seen in the 2008-2009 Financial Crisis. Gold relative to the S&P 500 regained all value lost after the Presidential Election and more as stock indexes tumbled.**

Once selling pressure abates, gold in dollars will catch a gear higher followed by embattled silver. I believe Comex gold will rise to resistance where there was once support - around the $1,550-level. Silver will follow just eeking above the $13-level. Although it has become more challenging, there is still a path to $1,800 per ounce in 2019.

The interest rate picture continues to grow less supportive. For weeks, the negative 10-year real rate has been solidly negative sustaining a very bullish environment for a non-interest earning asset like gold. It has turned positive, albeit still less than 0.5%, and some overseas 10-year rates have also turned positive - a less bullish trend for the yellow metal.***

* DXY yesterday (3/19) 102.61; 102.21 12/1/2016

** AUSP 0.6214 this AM; yesterday the AUSP high was 0.6242 (Thursday 3/12/20)

*** 10-year U.S. real rate +.37%; 10-year bonds: German Bund -0.31%, France +0.01% and Japan +0.04%;.

This chart shows how out-of-whack oil has become relative to historical norms for the gold-to-oil ratio.

Comex Gold-to-Nymex WTI Ratio

This morning, Comex copper is below the key $2.5-level at $2.2100 per pound. This chart illustrates what liquidation looks like:

What liquidation looks like for copper & gold

China, which still represents copper's highest demand, is on the mend. 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 0.7786 below the coronavirus peak of 1.8399 set February 11 and the 5-year average. The covid-19 pandemic is stabilizing in China - a good sign! (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.

Remember, you can register with the Centers for Disease Control and Prevention (CDC) for updates by e-mail. Look at the situation summary tab on their website for updated U.S. infections and deaths.

McEwen COV-19 Update

McEwen Mining Inc. just released a Covid-19 focused press release today:

McEwen Mining Provides Operations Update and Withdraws Production Guidance Due to COVID-19 Pandemic (March 20, 2020 Press Release)

Stay safe miners!

How Bad Could 2020 Be?

Goldman Sachs' Chief Economist Jan Hatzius now sees second quarter U.S. GDP decline dropping -24% but then two large GDP gains in the third and fourth quarters.

Here are the annualized quarter-on-quarter growth rates:

Q1: -6%

Q2: -24%

Q3: +12%

Q4: +10%

He is known for his accurate economic forecasts including the 2008-2009 Financial Crisis.

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 $13 per ounce showing a flicker of strength 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 Wednesday, 3/18, of 123.9 ounce per ounce solidly above July 11 high of 91.3 - a trend down from this top is bullish for silver if the Lustrous One continues its rally.

At 120.1 [Update Friday closing prices], silver is historically very, very cheap relative to gold!

The 10-year average GSR is much lower at 68.1 ounce per ounce.

The 3-month beta with gold improved this week, currently 1.13 (i.e. on average, the daily % rise or fall of silver price is beta times the % change in gold price). You prefer a high beta (i.e. greater than 1.00) when gold rallies higher (click on image for larger size).

Gold-to-Silver Ratio [Update Friday closing prices]

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. They have tracked steadily down from there with a dive to the 1% level this week. Expectations are falling at a slightly slower pace than 10-year U.S. Treasury yields resulting in positive real rates again (see Weekly Summary Charts) - a bearish signal for a non-interest earning asset like gold.

10-year Inflation Expectations

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 [Update Friday closing prices]

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 0.6214 just below the recent high of 0.6242 set March 12, 2020. Importantly, the ratio has aggressively left the downward trending channel with an uptrend trend of higher-lows starting with the October 2018 low. This week the ratio put lots and lots of daylight above that trend - bullish gold! [Update Friday closing prices, AUSP new high 0.6456]

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 solidly above trend].