Compressed Air Tanks
Croesus Mine, Eureka, Nevada
Croesus Mine, Eureka, Nevada
Friday, August 17, 2018 AM
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 8/31/2018)
Morning Miners!
A very strong U.S. dollar threw metals in the crusher this week.
Comex gold plunged to $1,167 yesterday. Comex silver and copper made new lows for the year on Wednesday as the U.S. Dollar Index (DXY) came within a hair of 97 - a level not seen since June of last year [please see hi/lo summary in Scorecard below].
Although the Turkish lira is the poster child for failing currencies, the native monies of emerging economies around the world are getting hammered by the dollar. Many of those counties have taken out U.S. dollar denominated debt which is becoming increasingly harder to pay back - a double whammy of greenback wows. In addition to direct dollar pressure, it is suspected that gold also suffers from central bank selling in countries trying to desperately to raise U.S. dollars.
I continue to believe the Chinese yuan is the key currency to watch for indications on where where metals may be headed. With the second largest economy in the world, China is hardly an emerging nation anymore but suffers some of the same ills - too much debt and a deprecating currency. Gold and the yuan continue to fall in lock-step although other currencies are surfacing as secondary drivers of gold price, notably the euro and Japanese yen.
Even with this backdrop, I believe gold, silver and copper will recover some as the U.S. and China engage in low-level trade talks planned for later this month.
For more background, please read my weekly input to the Kitco Gold Survey below and these two Kitco News commentaries...
The Mystery of Gold and the Chinese Yuan (Richard Baker, Kitco News, 7/31/2018)
This mornings' price action:
Comex gold (12/18 contract) $1,186.1 per ounce,
Comex silver (9/18 contract) $14.685 per ounce
Comex copper (9/18/ contract) $2.6280 per pound
Importantly, the correlation of Comex gold price and Chinese yuan (USD/CNY) continues as the Japanese yen (USD/JPY) and euro (EUR/USD) now begin to play a part too. You don't need to understand all the statistical gibberish on this chart to see the closeness of gold price to a gold model based on these currencies (note shaded 3-month area, click on plot for larger image):
"So goes the yuan goes, so goes gold."
Have a relaxing weekend - you deserve it!
Inflation Watch
Inflation expectations made a new 2018 high April 23rd above a trend lines of higher lows (dotted lines, click on chart for larger size). After a sharp dip last on May 29th, expectations recovered but now appear to be falling below trend. The July CPI was up 0.2% for an annualized inflation of 2.9% (unchanged from June). European CPI dropped 0.3% for an annualized inflation of 2.1%. Is there a whiff of disinflation (i.e. slowing inflation rate) in the air?
10-year Inflation Expectations
Note: In the above chart inflation expectations peaked at 2.14% February 2nd but were surpassed April 23rd at 2.18%. May 29th dramatically broke the trend line of higher-lows falling to 2.04%. This decline recovered to 2.12% but now is 2.08% this Wednesday. New trend line of higher-lows is shown in dark blue; older trend lines, in light blue. Note that present trend now extends to the June 21, 2017 low. Wednesday's number fell below this trend.
Interest rates and inflation numbers going forward are greatly influenced by central bank policy worldwide. This Kitco commentary discusses what some of the moving parts are as well as useful indicators - watch the U.S. Dollar Index (DXY) and euro/yen cross rate:
The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)
Several of the charts in this column are updated below.
Old Glory
Eureka, Nevada
Scorecard
Here's a scorecard on where we stand with some of our favorite metals.
Intraday highs on the Comex futures exchange:
Gold $1,370.5 per ounce January 25, 2018 (April 2018 contract)
Silver $18.160 per ounce September 8, 2017 (Continuous chart))
Copper $3.3335 per pound ($7,349 per tonne) December 28, 2017 (May 2018 contract)
Intraday lows on the Comex exchange:
Gold $1,167.1 per ounce August 16, 2018 (December 2018 contract)
Silver $14.315 per ounce August 15, 2018 (September 2018 contract)
Copper $2.552 per pound ($5,626 per tonne) August 15, 2018 (September 2018 contract)
Comex copper is presently trading at $2.6350 per pound ($5,809 per tonne), now 21.0% below December's high. Improving global growth had kept the red metal above the key $3 per pound. Initial trade war fears dipped the red metal below this mark but copper then rebounded above $3. Current trade war tensions with China and deteriorating economic conditions there coupled with a strong U.S. dollar have sent the red metal plummeting. Copper price is now in bear bear territory (i.e. down 20%).
Total copper stored in LME and Nymex warehouses is 0.454 million tonnes, above last week (a weekly advance hasn't happened in a long time) but still well below the 0.5 million tonne mark.
LME inventories catching a gear higher:
It is instructive to keep our eyes on the Nymex inventories which are behind the LME and still falling (LME 257,625 versus Nymex 196,582 tonnes):
My Input to Kitco News
Target gold price $1,190 per ounce. Target silver price $14.7 per ounce.
The strong dollar has certainly been the bearish story for metals this week as the U.S. Dollar Index (DXY) nearly broke 97 Wednesday - a level not seen since June of last year. Looking a little closer, the euro and yen which are major components of the classic index, are less drivers of gold than the falling Chinese yuan which is not in the index. This has been true since this April.
Given the current relation, it is important to continue watching the Chinese yuan for gold direction. There is a suspicion that the People's Bank of China (PBOC) will try to stabilize the yuan before the upcoming low-level trade talks. Starting yesterday, the offshore yuan (USD/CNH) slipped below onshore currency (USD/CNY) - a sign traders are betting on short-term strengthening. This is bullish for gold.
My updated currency model for gold, which includes the euro, yen and yuan [see chart in the headline discussion], suggests a Comex range of $1,190 to $1,216 per ounce if the yuan stabilizes near current levels.
I will pick the bottom of this range for next week's target: $1,190 per ounce gold. Silver will find comfort at $14.7 per ounce[see Weekly Summary Chart]
Additional Note:
The fate of the Chinese yuan remains a key tell for gold and copper; a material drop in valuation could impact both negatively. Some suspect currency devaluation is being used as a tool in a U.S./China trade war. Something to watch: the yuan has been dramatically weakening since mid-April.
The yuan stabilized below 7 USD/CNY for 2017 and started stronger in the new year followed by a weakening trend. The yuan is now above the 6.8-level at 6.8751 USD/CNY putting a lot of daylight above the March 26th low (i.e. much stronger level) of 6.2342. A 1-month yuan volatility of 0.64% is in line with major currency levels and comparable to gold - something else to watch compared to 1-month volatilities of euro and yen*
* the euro & yen 1-month volatilites are 1.14% & 0.43% respectively; Comex gold 1-month volatility is an elevated 1.25%
Weekly Summary for Aug 17, 2018 AM
Weekly Summary for Aug 17, 2018 AM
(click on table for larger size)
Yearly Summary for 2017
(click on table for larger size)
Comex gold gained nearly 14% for the year but was outpaced by Comex copper that enjoyed a 32% uptick in price. Comex silver lagged both for a respectable 7.2% gain. Overall, gold gained 12% on the broader Bloomberg Commodity Index (BCOMTR:IND) which includes everything from crude oil to things that oink. In terms of major currencies, gold in terms of yen advanced almost 10% but slipped 0.4% relative to the strengthening euro.
Although gold slipped 5% in value relative to the S&P 500 it was not a bad year at all for the yellow metal!
Gold Price Revised Outlook for 2018:
My Comex gold range for 2017 was $1,250 to $1,400. We closed 2017 comfortably above $1,300 at $1,309.3 (February contract).
Let's assume 2018, like 2017, is a mix of buoyant market expectations and rising rates with occasional geopolitical, political and economic shocks. Gold will feel the headwinds of the former and enjoy price spikes in times of market stress. My latest revised range given the strong correlation with falling currencies compared to a strong U.S. dollar is a $1,150 floor with highs not exceeding $1,380 per ounce.
2018 will prove a less bullish period for gold than last year with higher interest rates in the U.S. Inflation will be another key factor to monitor, it has been on the rise but now may be moderating (see chart above in discussion).
The difference between interest rates and inflation expectations drives gold price; if the former leads the latter, there could be stiff headwinds for the lustrous metal. A trade war that results in slower growth and higher inflation could be potentially very bullish for gold.
Here's the beer bet for 2018: Gold will fall below $1,220 before rising above $1,380. We ended 2017 in the middle of that range with prices just above $1,300 - a fair starting point [Gold bet won Thursday July 19]
Important charts to watch remain the gold-to-S&P500 or AUSP (see "Chart to Watch" below) and gold in terms of major currencies euro and Japanese yen (directly below). An explanation of the charts below is given in this Kitco News column:
The Gartman Gold Trade Revisited (Kitco News, 2/14/2018)
Note the recent fall in gold value for all three currencies:
Click on the image for a larger size:
Gold in euro & yen terms with good margin above 2013 lows
Divergence resumes for gold in terms of euro compared to yen:
Gold euro/yen spread widens again in 2018
Note for currency buffs: Value parity in the above chart occurs when the EUR/JPY cross rate is 139.24; something to watch for - presently 126.08 yen per euro as the gold euro/yen spread resumes divergence.
Chart to Watch
Here's a chart to watch for 2018. 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 bottomed again December, 12, 2017 (0.4661) and again August 15, 2018 (0.4172). Currently this AM the AUSP is at 0.4177 bearishly breaking the lower boundary of a downward trending channel (revised 8/10, green/red dotted lines).
Cheers,
Colonel Possum & Mariana
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