The Eureka Miner

Friday, February 19, 2016

Gold & Copper Hang Tough; Barrick & Newmont on a Roll

Bonnie & Clyde

Eureka Miner, September 2010

Please checkout my latest Kitco News commentary 2/29/2016):

Gold & Oil: A Historical Ratio Turns Bad

Update Friday, 2/26/2016

Gold price continues to be resilient even as risk appetite improves globally. Oil price is showing some signs of price stabilization and copper is on a tear given comments from China's Finance Minister Zhou Xiaochuan ahead of the G20 meetings in Shanghai. The PBOC is trying to damp fears of a dramatic yuan devaluation and to express flexibility in future monetary policy - both bullish indicators for markets. U.S GDP was also revised upwards for the fourth quarter from +0.9% to 1.0%; core inflation, from +0.9% to +1.0%. The latest data relieves some concerns about recession.

Current Comex/Nymex prices this morning:

Gold $1,229.8/oz

WTI crudes $34.09/bbl

Copper $2.1395/lb

Barrick Gold (ABX) $13.39

Newmont (NEM) $25.69

Freeport-McMoRan (FCX) $7.675

My input to the weekly Kitco Gold Survey:

Gold's relation with commodities remains dramatically broken:

Valuations relative to global benchmarks oil and copper are near historic highs (i.e an ounce of gold buys a whole lot of either)
The correlation with the red metal is zero on both a 1-month & 3-month basis - a highly unusual combination!
Looking forward, the the 5-day correlations with gold & copper are negative - the yellow metal is traveling on a different highway; going to a different destination.

A better model for future gold price arises from its relation to currencies. Gold in euro terms continues to rise higher on Brexit concerns [i.e the U.K. June referendum to stay in or exit from the European Union] topping EUR 1,120 this week (up nearly 30% from its 2013 low). Gold and Japanese yen continue to compete as safe haven trades with the yellow metal moving sideways in yen terms blunting recent gains to the upside. Nonetheless, gold is a healthy 14% above its 2013 low in that currency.

Yellow metal progress against major devalued currencies continues to be a bullish indication. All-in-all the Lone Wolf is bullish and reiterates last week's target price.

My vote is up. Next week’s target $1,260 per ounce.

Mining Quarterly

The Spring 2016 Spring Edition of the Mining Quarterly will be out March 2.

I have recently submitted an update on the gold and copper price ranges discussed in the last issue below - gold is starting to show some glitter, pardner!!

The online version:

Winter 2015 Mining Quarterly

"Click to read" and the online version looks much like the printed magazine. My column on copper and gold prices for 2016 starts on page 85 (page 82 printed version). Press "Esc" to return to the Elko Daily Free Press. There is a handy scroll bar for page selection at the bottom of the screen. The same article appeared in the Elko Daily Free Press December 3:

What do copper & gold signal for 2016?

***

Please checkout Mariana's Eureka, Nevada on Facebook

Numbers used for analysis (AM prices):

Goldman Sachs Commodity Index

S&P GSCI 294.7, 03/16 contract (intraday low 279.25 1/20/2015)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $32.08 per barrel

Brent crude $ 33.58 per barrel

Comex copper $2.0755 per pound

Comex gold $1,228.4 per ounce

Comex silver $15.395 per ounce

Canary in the gold mine: Fate of high yield corporate bonds

iShares iBoxx $ High Yield Corporate Bond (HYG) $77.19 ($75.09 52-week low)

Trouble ahead: HYG < $82...oh-oh

Latest Nevada gasoline prices

Alpine Bar Mirror

Eureka Miner, September 2010

Gold & Copper Hang Tough

Macro drivers: Continued concerns about China, commodity-exporting economies; U.S. Federal Reserve interest rate trajectory

Wild cards: "Lower for longer" commodity prices, Fate of high yield bonds

Gold bet for next week: $1,260

Morning Miners!

For old times sake, The Eureka Miner will feature photos and excerpts from the past in this report and ones to follow. Here's an oldie interview with Barrick Gold ex-CEO Aaron Regent from September 23, 2010:

Arguing the reasonableness of $1300/oz gold, Mr. Regent stated that in "real terms" the present price is only 55% of the 1980 peak of $2300/oz (i.e. the inflation adjusted price). He also cited the stability of oil and copper prices in terms of gold (i.e barrels of oil and pounds of copper per ounce of gold). Followers of this Report understand the importance of the oil/gold and copper/gold relation since both oil and copper are proxies for global growth. Comparing their value with gold removes currency variability. Mr. Regent said that historical averages of 15 barrels of oil and 433 pounds of copper per ounce of gold are in line with today's prices...

Was Aaron Regent right about gold and oil? Checkout the "Chart to Watch" below.

It would be great if gold price would return to $1,300 per ounce this year, so far it's showing a lot of strength. Thursday Comex gold touched $1,240 presently trading at $1,228.4. I believe the 2-month uptrend is still intact. It is important to compare gold performance with currencies instead of commodities in this environment. My morning input to the Weekly Kitco Gold Survey:

On the currency front, gold continues to bullishly rise in euro terms peaking at EUR 1,110 yesterday. Gold in yen terms has softened with a strengthening Japanese currency but is still more than 13% above its 2013 low. By comparison gold in euro is more than 25% above this key benchmark. Yellow metal progress against major devalued currencies is a bullish indication.

All-in-all the Lone Wolf remains bullish and reiterates last week's target.

My vote is up. Next week’s target $1,260 per ounce

The red metal is faring pretty well too. I thought copper may return to the sub-$2 basement after the Chinese traders returned from New Year holiday. Instead, copper got a bid rising from its February 11 low of $1.998 per pound to a high today of $2.0940, a nearly 5% rise.

Freeport Up-up

Copper mammoth and benchmark miner Freeport McMoRan (FCX) is also showing signs of life trading at $7.05 per share up from its January low of $3.52 - a 100% improvement!

Barrick & Newmont on a Roll

It is exceptionally encouraging to witness Nevada's two big mining giants recovering from the depths of 2015. From September's low of $5.91 per share, Barrick Gold (ABX) is up 119% to trade at $12.94 this morning. Newmont (NEM) is up a respectable 65%; from a September $15.43 to $25.60 per share.

A sobering comparison is Barrick at $46.78 and Newmont at $64.30 per share in today's oldie September, 2010 report. Those were the days - let's hope the worst id behind us, pardner.

Chart to Watch

The ignominious demise of a gold & oil platitude [updated with corrections 2/24/2016]

In 2010, Barrick Gold ex-CEO Aaron Regent cited a historical gold-to-oil ratio of 15 bbl/oz when asked if $1,300/oz was an excessive price for gold. His reply was that gold price was in inline with the "historical average" for the ratio. [Regent Video CNBC News, 9/23/2010]

Comex Gold-to-Nymex WTI Ratio

(click on chart for larger image)

The above chart shows that Mr. Regent's comment was not unreasonable from the start QE-2 to the end of QE-3 (11/3/2010 to 10/29/2014). During that period, the mean ratio was 15.7 bbl/oz with a standard deviation of 2.5 bbl/oz. Through the high oil prices of Arab Spring & peak gold following the U.S. credit crisis, most of the data fall obediently within 2-standard deviations of the mean. After October 2014 the model diverged to a climax of 47.1 bbl/oz this February - a jaw-dropping 12.5-standard deviations.

This model has followed Mr. Regent down the mine shaft.

Lesson Learned: A technological disruption (fracking shale) has dramatically changed oil's valuation relative to gold - somewhat like comparing the value shift from wooden wheels to rubber tires. It is anyone's guess what the new steady-state ratio will be.

The gold-to-copper ratio scored a high on par with its 2009 peak (~620 lbs per ounce) on the same day as the oil ratio peaked (2/11/2016). However, the technology of mining gold and base metals hasn't changed and varies mostly in the recovery/reduction process of the extracted ore (digging ore out the ground is essentially the same). In other words, the gold/copper model is pretty good, pretty stable with R-squared ~0.6 (more statistical gibberish that indicates reasonable model quality).

Over the same QE-2 to QE-3 period, the gold-to-copper ratio was 420 lbs per ounce. Again, reasonably close to Aaron Regent's average. The current 3-month average ratio is 530 pounds per ounce. Gold value relative to copper has been slowly trending higher since mid-2006.

Market Stats

Here's the scorecard on the stock market, S&P 500 is at 1,905.61 (Friday AM):

Market corrections are generally defined as a 10% or greater move to the downside from the top of a key index. I like to use the S&P 500 (.SPX) because it includes a broader swath of America' best companies than the Dow Jones Industrial (.DJIA) - five hundred compared to thirty. Here is the score sheet of ups and downs on an intraday basis since May:

August downdraft:

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

Then from the late December high, the February downdraft:

S&P 500 high: 2,081.56, 12/29/2015
S&P 500 low: 1,810.10, on 2/11/2016 down 13.0% & 15.2% from 5/20/2015 high

S&P 500 bear market begins below 20% at 1,707.78

For Fibonacci folks the December-January "fib box" is:

50.0% retracement from 2/11 low = 1,946

61.8% retracement from 2/11 low = 1,978

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

We're still below the Dec-Feb fib box - a very bearish indication.

Cheers - Colonel

Photos by Mariana Titus

Friday, February 5, 2016

Gold & Copper Giddy-up Go - Year of the Red Fire Monkey

Newark Valley, Nevada
Eureka Miner, February 2011

Update Friday February 12, 2016

Comex gold touched a new high yesterday ($1,263.9 per ounce). Although the yellow metal has pulled back to presently trade $1,235.2, the ole Colonel believes it has more room to run next week. My input to this morning's Weekly Kitco Gold Survey:

A very important indicator for gold price next week will be copper. I believe when Chinese trader's return from holiday, copper will take another trip below $2.0 per pound ($4400/tonne) blunting its recent rally. As copper tumbles, gold will rally on renewed fears about decline in global growth. The gold-to-copper ratio Thursday hit levels not seen since the 2008-2009 financial crisis (620 pounds per ounce) and will likely rise further (>700) as copper seeks equilibrium with sub-$30 per barrel oil. The oil-to-copper ratio plumbed an historic low yesterday (13 pounds per barrel) and should find relief next week with falling copper prices (chart below).

On the currency front gold continues to bullishly rise in value relative to both the euro and yen. It will be interesting to monitor the Chinese yuan post-holiday given a widening spread between offshore (CNH) and official rates (CNY). Gold price has been rising in terms of yuan which has not yet dampened consumer enthusiasm for the yellow metal as a currency hedge. All-in-all the Lone Wolf is feeling rather bullish lately.

My vote is up. Next week’s target $1,260 per ounce

My thoughts on currencies and gold (near end of column):

Love For Gold Spreads Worldwide (Sarah Benali, Kitco News, 2/11/2016)

A historic low will find relief next week on falling copper prices

(click for larger view)

Update Thursday February 11, 2016

Terrific morning for gold & gold miners on another global market selloff! Investors are racing to gold, Japanese yen and US Treasuries for safe haven as oil dips below $27/bbl and stocks plunge. Gold is pulling ahead in the currency war (see chart):

Comex Au $1,263.4/oz 11:30am ET; presently $1,251.8/oz

Comex Ag $15.975/oz 11:30am ET; presently$15.965/oz

Comex Cu presently, $2.01250/lb (hanging in there, still>$2)

Nymex WTI crude $26.22/bbl new low, falls below $27/bbl; presently $27.14

10:42am ET

Newmont (NEM) $25.27 up 3.996%

Barrick (ABX) $12.48 up 7.73%

This is good news for gold miners! What a morning...

Gold is pulling ahead in the currency war (click for larger view)

Mining Quarterly

The Spring 2016 Spring Edition of the Mining Quarterly will be out March 2.

I have just submitted an update on the gold and copper price ranges discussed in the last issue below - gold is starting to show some glitter, pardner!!

The online version:

Winter 2015 Mining Quarterly

What do copper & gold signal for 2016?

***

Please checkout Mariana's Eureka, Nevada on Facebook

Numbers used for analysis (AM prices):

Goldman Sachs Commodity Index

S&P GSCI 290.55, 02/16 contract (intraday low 269.00, on 01/20/2016)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $31.11 per barrel

Brent crude $ 33.98 per barrel

Comex copper $2.0980 per pound

Comex gold $1,149.7 per ounce

Comex silver $14.745 per ounce

Canary in the gold mine: Fate of high yield corporate bonds

iShares iBoxx $ High Yield Corporate Bond (HYG) $77.85 ($75.82 52-week low)

Trouble ahead: HYG < $82...oh-oh

Latest Nevada gasoline prices

Big Smoky Valley

Eureka Miner, February 2011

Gold & Copper Giddy-up Go

Macro drivers: Continued concerns about China, commodity-exporting economies; U.S. Federal Reserve interest rate trajectory

Wild cards: "Lower for longer" commodity prices, Fate of high yield bonds

Gold bet for next week: $1,135 trend support

Morning Miners!

For old times sake, The Eureka Miner will feature photos and excerpts from 2011 in this report and ones to follow. That was the year when China began to slow but oil and copper prices started on a tear. Gold would set an all time record later that year along with some market mayhem. Here's a blurb from February 15, 2011:

Let's update the record books for the big three metals with copper's new high and add Brent crude as a reminder of what may come our way soon:

COMEX Gold $1432.5/oz 08:25:00 ET 12/7/2010, February contract most active
COMEX Silver $31.275/oz 08:15:00 ET 01/03/2011, March contract most active
COMEX Copper $4.6495/lb 18:15:00 ET 02/14/2011, March contract most active
ICE Brent crude $104.30/bbl 16:30:00 ET 02/14/2011, April contract most active

Those were the days my friend!

Year of the Red Fire Monkey

Gold and copper are feeling some giddy-up go this new year of the Chinese Red Fire Monkey against a backdrop of otherwise declining commodity and equity markets. I just submitted a column on both for the upcoming Spring 2016 Edition of the Mining Quarterly which will be out March 2.

This morning Comex gold posted a 3-1/2 high of $1,164.0, now trading at $1,149.7 per ounce [UPDATE: Friday close $1,157.7, new intraday high $1,175]. Comex copper has recovered nicely from its scary $1.936 low January 19 posting its recent 2016 high yesterday at $2.138 per ounce, now trading at $2.0980 per pound. I believe gold has more to go but the red metal may need another trip to the basement after the Chinese New Year before heading higher again.

This is how the ole Colonel summarized the near term fortunes of both metals for the Kitco Weekly Gold Survey:

Will a confluence of celebrations - Super Bowl, Mardi Gras & Chinese Lunar New Year - bring more glitter to gold? Probably not.

Chinese New Year will draw liquidity form the metals market potentially increasing volatility next week. When traders there return from holiday it is likely copper will retreat from recent highs and gold may resume its rally on renewed fears of declining global growth.

In the meantime, I believe the yellow metal will step back to trend support after making 3-1/2 month highs. Key features this week were the abrupt decline of the U.S dollar relative to the euro and yen together with a rapid re-correlation of copper with gold. Although these events supported price increases for both, this may not last.

There is still divergence of monetary policy between the U.S. vis-à-vis Europe and Japan, even though the U.S. Fed may slow the pace of interest rate increase. This supports a stronger dollar. Although to a lesser degree than oil, copper production is not slowing fast enough to support much higher prices and could again retest sub-$2 per pound lows.

My vote is down. Target for next week $1,135 per ounce.

Hey, I'm not a party pooper - it's just a tough market environment, pardner!

Jobs, Jobs...

For example, this morning was a mixed monthly jobs report. It disappointed on jobs added, 151,000 versus 185,000 expected, but unemployment fell to 4.9% with a slightly higher participation rate. This restarts the debate about what the Fed will do in March with consensus still favoring a delay in rate hikes on fears that the U.S. economy is slowing. A delay will favor gold price.

Here's the whole enchilada for January:

Employment Situation Summary

Unemployment 4.9% (5.0% December)
Participation rate 62.7% (62.6% December)

Employment in mining continued to decline in January (-7,000). Since reaching a peak in September 2014, employment in the industry has fallen by 146,000, or 17 percent.

Let's put that behind us for now and look forward to a great Super Bowl weekend!

Chart to Watch

Gold price margins from 2013 lows (euro, yen)

A disturbing aspect of gold's 2015 decline in USD was the concurrent collapse in euro and yen terms.

The yellow metal has stayed above its 2013 lows in terms of both currencies. The percent margin above those bottoms peaked in late January and has then trended down with the divergence of US monetary policy from Europe and Japan, and the associated rise of the US dollar. (click on chart for larger image).

Since late-October, the margin's rapid decline relative to yen was particularly troubling. I maintain that declining value of gold relative to a devalued currency is a red flag. Fortunately, January witnessed a key reversal in this downtrend for both euro and yen - very bullish for gold!

2013 lows:

879.64 euros per ounce on 12/20/2013
122,443 yen per ounce on 6/28/2013

Friday AM (02/05/2016):

1033.44 euros per ounce (+18.8% margin)
134,655 yen per ounce (+9.8% margin)

Market Stats

Here's the scorecard on the stock market, S&P 500 is at 1,901.35 (Friday AM):

August downdraft:

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

Then from the late December high, the January downdraft:

S&P 500 high: 2,081.56, 12/29/2015
S&P 500 low: 1,812.29, on 1/20/2015 down 12.0% & 15.1% from 5/20/2015 high

S&P 500 bear market begins below 20% at 1,707.78

For Fibonacci folks the December-January "fib box" is:

50.0% retracement from 1/20 low = 1,946.9

61.8% retracement from 1/20 low = 1,978.7

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

We're still below the Dec-Jan fib box - a very bearish indication.

Cheers - Colonel

Photos by Mariana Titus

Sunday, January 10, 2016

Gold's Amazing Week, $1,113; Jobs Report Spares Armageddon; Watch the Yuan

Eureka Quartzite, Lone Mountain
Eureka, Nevada

Latest Updates

Friday morning, Jan 15, 2016

The Eureka Miner will publish a summary of market events later next week...but in the meantime...

The global sell-off continues with equities plunging globally. The DOW has shed 400 points and the S&P500 is down 2.4% at 1,875.89

Comex Copper scores a new low of $1.9385 per pound (3/16 contract)

WTI dropped to $29.28/bbl , presently trading at $29.65/bbl

Here are my thoughts on gold sent to the Kitco Weekly Gold Survey moments ago (8:11 a.m. PST):

Thank heavens gold is still running with the currency pack and not commodities! If the latter were true, this week's washout in oil and copper would certainly have pushed the yellow metal below $1,000 per ounce. That said, the currency picture is a mixed bag by week's end with gold gaining strength on the euro but trending towards its 2013 low in yen terms. These comparisons are important because weakness relative to a devalued currency remains a red flag (chart attached - in morning trading, gold is only 4.4% above its 2013 low in yen terms;a much more comfortable 13.3% in euro).

(Click for larger view)

It is encouraging that gold has regained safe-haven status again as global equities plummet but it faces fierce competition from The Japanese yen and U.S. Treasurys with the 10-year dipping briefly below 2%. I believe it likely that some of the early pop seen this Friday will fade in the coming shortened market week. My vote is down. Target price $1,080 per ounce.

The Lone Wolf did not win the PowerBall lottery, however...

Last Friday's target price for this week was $1,090; Comex gold is presently trading at $1,089.9 (10:55 a.m. EST)

It ain't over til' it's over!

Wednesday evening, Jan 13, 2016

POWERBALL WINNING NUMBERS 08, 27, 34, 04, 19 Power 10

The S&P 500 continues its 2016 decline falling down another 2.5% closing at 1.890.28...down 7.5% only 13 days into the New Year!

Benchmark miner Freeport-McMoRan (FCX) closed at $3.74, now over 73% below early-October's share price.

Comex Copper just punched in another new low of $1.942 per pound (3/16 contract) in after hours trading

Oil closed at $30.48/bbl (WTI 2/16 contract). WTI dropped to $29.92/bbl 1/12 before recovering above $30/bbl

Comex gold has stabilized at $1,087.1 per ounce (2/16 contract)

It ain't over til' it's over!

Tuesday morning, Jan 12, 2016

The Stoxx 600 Miner's Index is at its lowest point since October 2003

This report's Eureka Miner's Index (EMI, see sidebar) is presently 0.11, a new low. For comparison the EMI scored a high of 816.78 on January, 4, 2011.

Benchmark miner Freeport-McMoRan (FCX) is currently trading at $3.88, over 70% below early-October's share price.

Comex Copper just punched in a new low of $1.9525 per pound (3/16 contract)

Oil is getting closer to $20 territory scaring up $30.10 per barrel this morning (WTI 2/16 contract), we could test $28 oil in the short term...[Update, WTI dropped to $29.93/bbl before recovering above $30/bbl]

Comex gold is losing some giddy-up at $1,087.6 per ounce (2/16 contract)

Not pretty out there in commodity land!

Monday morning, Jan 11, 2016

Comex Copper dropped below the key $2-level to plumb $1.9665 per pound, presently trading at $1.9785; Comex gold is back above $1,100, presently $1,101.8 per ounce. The Chinese onshore currency (CNY) has stabilized some with PBOC buying the offshore renminbi (CNH), The Shanghai is down another 5.3% at the Monday close. The U.S. stock markets opened sheepishly higher - what a mess for the New Year!

Latest News

BHP Downgraded, Freeport A Buy: Watch Copper, HSBC Says (Barrons 01/12/2016)

What do copper & gold signal for 2016? (by Richard Baker, Elko Daily Free Press, 12/03/2015)

Timberline Provides Update on Proposed Acquisition by Waterton Precious Metals Fund II Cayman, LP (Press release, 12/03/2015)

Mining Quarterly

The online version:

Winter 2015 Mining Quarterly

What do copper & gold signal for 2016?

***

Please checkout Mariana's Eureka, Nevada on Facebook

Numbers used for analysis (01/08/2016 Friday close):

Goldman Sachs Commodity Index

S&P GSCI 295.00, 01/16 contract (intraday low 292.95, on 01/07/2016)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $33.16 per barrel (intraday low $32.10 on 01/07/2016)

Brent crude $ 33.93 per barrel (intraday low $32.55 on 01/07/2016)

Comex copper $2.0220 per pound (intraday low $1.990 on 01/07/2016)

Comex gold $1,097.9 per ounce (intaday high $1,113.1 on 01/08/2016)

Comex silver $13.918 per ounce (intraday low $13.620 on 12/14/2015)

Canary in the gold mine: Fate of high yield corporate bonds

iShares iBoxx $ High Yield Corporate Bond (HYG) $79.52 ($78.21 52-week low)

Trouble ahead: HYG < $82...yikes, we're there!

Latest Nevada gasoline prices

Cliffs of Devonian Dolomite & Limestone

Devil's Gate, Eureka, Nevada

Gold's Amazing Week, $1,113

Macro drivers: Continued concerns about China; U.S. Federal Reserve interest rate trajectory

Wild cards: Chinese Yuan Devaluation, Further oil price decline, Fate of high yield bonds

Gold bet for next week: $1,090 territory

Happy New (Market) Year Miners!

What a way to begin 2016! Monday started with a global sell-off on China fears followed by steep declines in U.S. stock markets not seen for a "new year start" since 1932...no wait, it got worse Thursday...not seen ever, EVER!

Whoa! It's not all that bad, pardner. I'm writing this Saturday morning and Friday closed as "the worst first week" of the year since 2011...that's a little better than ever, EVER. Nonetheless, the S&P 500 stumbled into 2016 by losing 6% of its value in one week, the DOW experienced similar loss (see "Market Stats" below). The good news? Gold is up more than 3.5% peaking to $1,113.10 per ounce Friday; the closing price scored $1,097.9.

Gold's commodity buddies didn't fare nearly as well. Oil dropped to new lows visiting $32 per barrel territory; copper dipped briefly below $2. The Goldman Sach's Commodity Index (GSCI) punched in a new low Thursday. At least you can now enjoy $2.09 per gallon gas at Carson City Costco.

What was behind all the New Year carnage? Was it the North Korean (maybe-we've-got-an) H-bomb test? Was it China's micro-managed Shanghai stock exchange falling like a knife? No, these were marginal influences. Think back to August - a similar market reaction across asset classes and a bump up for gold. Same root cause: depreciation of the Chinese yuan (or renminbi CNY ¥) against the U.S. dollar.

On Monday, a U.S. dollar bought 6.4837¥; by Friday, 6.5829¥....a move of 1.5%. In currency land that's a decent move but not a run for the exits. Stepping back at bit, the USD fetched 6.1197¥ on August 10 when the PBOC began its recent managed devaluation - a move-to-date of 7.6%. A Reuter's article predicted Thursday that there could be another 10-15% on the horizon...that would be a big move.

There are two parts to the yuan story: 1) Investors worrying that further depreciation signals worse-than-expected economic conditions in the world's second largest economy, and 2) the recent inclusion of the yuan into the coveted IMF club of major reserve currencies (U.S. dollar, euro, Japanese yen, Bristh pound and now the Chinese yuan)

IMF Managing Director Christine Lagarde said the decision [to include the yuan] represented "an important milestone" in China's integration into the global financial system. "It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China's monetary and financial systems," she said in a statement. (CNN Market Report, 12/01/2015)

Last week's market reaction is clearly due to a fear that the yuan has stumbled into free fall. A more moderate view (which I support) is that the Chinese currency is slowly moving to a market-based valuation (as desired by the IMF) from its U.S. dollar peg. A bumpy road but hopefully not a tailspin transition.

Friday morning, a positive monthly U.S. nonfarm payroll report of 292,000 jobs added in December and stable 5% unemployment rate helped blunt market Armageddon. The world's largest global economy is still humming along. How did all of this affect gold price this week? Here's what I told the Kitco Weekly Gold Survey (Kitco calls the ole Colonel the "Lone Wolf" for my often contrarian inputs, reference last sentence):

Gold had a great week indeed. I think we'll see some pullback next week given this morning's better-than-expected NFP which blunts recent global Armageddon scenarios. The key currency to watch is the Chinese yuan.

My vote is down. Target price $1,090 per ounce.

Discussion: Gold achievements this week are a bullish reversal in terms of both the euro and the yen ["Chart to Watch" below] and a spike in value relative to key commodities oil and copper. An ounce of gold now buys an amazing 33 barrels of oil and 540 pounds of copper. The former is a new record; the latter, at levels not seen since the financial crisis. As a point of comparison, the yuan devaluation last August triggered similar spikes - 30 bbl/oz and 517 lb/oz (the 3-month averages for both are now 28.4 and 516).

There seem to be at least two camps for explaining the ongoing yuan devaluation. The more extreme is that the yuan will depreciate a further 10-15% relative to the USD (Reuter's story yesterday). A more moderate view is that the PBOC is transitioning the yuan, in a hopefully stable manner, from a USD peg to valuation against a basket of currencies. With a stronger dollar, most of those currencies are falling - so falls the yuan. If the latter proves true, then the yuan devaluation should have the similar effects on gold as the currencies in the basket. For example, gold has reversed its downtrend relative to the euro so gold in euro terms is receiving a nice bounce in price.

Of course, as gold price in yuan rises consumer demand in China may fall. All-in-all, the yuan devaluation is likely only another 3-5% and its affects on gold price contained. The extreme case may cause a rush to the exits for many asset classes and gold benefits only if it maintains its new found safe haven status (wherein the bump-up in USD gold price could be potentially substantial).

The last 2015 Lone Wolf gold target came within 20 cents of the 2015 closing price for Comex gold (2/16 contract): $1,060 versus $1,060.2 per ounce.

Chart to Watch

Gold price margins from 2013 lows (euro, yen)

A disturbing aspect of gold's decline in USD is the concurrent collapse in euro and yen terms.

The yellow metal has stayed above its 2013 lows in terms of both currencies. The percent margin above those bottoms peaked in late January and has since trended down with the divergence of US monetary policy from Europe and Japan, and the associated rise of the US dollar. (click on chart for larger image).

Since late-October, the margin's rapid decline relative to yen has been particularly troubling. I maintain that declining value of gold relative to a devalued currency is a red flag. Fortunately, last week witnessed a reversal in this downtrend for both euro and yen.

2013 lows:

879.64 euros per ounce on 12/20/2013
122,443 yen per ounce on 6/28/2013

Friday close (01/08/2016):

1005.31 euros per ounce (+14.3% margin)
128,718 yen per ounce (+5.1% margin)

Market Stats

Here's the scorecard on the stock market, S&P 500 is at 1,922,03 (Friday close):

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

S&P 500 bear market begins below 20% at 1,707.78

Key "next level" to watch going down is 1,820.66 (low on 10/15/2014, down 14.7%)

For Fibonacci folks the "fib box" is:

50.0% retracement from 8/24 low = 2,000.87

61.8% retracement from 8/24 low = 2,032.45

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

Last week, the S&P 500 has fallen straight though the old fib box - a very bearish indication.

Kitco News Gold Survey

My (full) input to the Kitco News Weekly Gold Survey:

Gold had a great week indeed. I think we'll see some pullback next week given this morning's better-than-expected NFP which blunts recent global Armageddon scenarios. The key currency to watch is the Chinese yuan.

My vote is down. Target price $1,090 per ounce.

Discussion: Gold achievements this week are a bullish reversal in terms of both the euro and the yen (attached chart) and a spike in value relative to key commodities oil and copper. An ounce of gold now buys an amazing 33 barrels of oil and 540 pounds of copper. The former is a new record; the latter, at levels not seen since the financial crisis. As a point of comparison the yuan devaluation last August triggered similar spikes - 30 bbl/oz and 517 lb/oz (the 3-month averages for both are now 28.4 and 516).

There seem to be at least two camps for explaining the ongoing yuan devaluation. The more extreme is that the yuan will depreciate a further 10-15% relative to the USD (Reuter's story yesterday). A more moderate view is that the PBOC is transitioning the yuan, in a hopefully stable manner, from a USD peg to valuation against a basket of currencies. With a stronger dollar, most of those currencies are falling - so falls the yuan. If the latter proves true, then the yuan devaluation should have the similar effects on gold as the currencies in the basket. For example, gold has reversed its downtrend relative to the euro so gold in euro terms is receiving a nice bounce in price.

Of course, as gold price in yuan rises consumer demand in China may fall. All-in-all, the yuan devaluation is likely only another 3-5% and its affects on gold price contained. The extreme case may cause a rush to the exits for many asset classes and gold benefits only if it maintains its new found safe haven status (wherein the bump-up in USD gold price could be potentially substantial).

The last 2015 Lone Wolf gold target came within 20 cents of the 2015 closing price for Comex gold (2/16 contract): $1,060 versus $1,060.2 per ounce

This week's scorecard. Note gold's large jump in commodity value (click on chart for larger image):

Compared to mid-October, Friday (10/16):

Cheers - Colonel

Photos by Mariana Titus

Friday, December 18, 2015

Gold Rebound $1,064 - Where's Santa?

Eureka Opera House
Eureka, Nevada

Latest News

What do copper & gold signal for 2016? (by Richard Baker, Elko Daily Free Press, 12/03/2015)

Timberline Provides Update on Proposed Acquisition by Waterton Precious Metals Fund II Cayman, LP (Press release, 12/03/2015)

General Moly Announces Closure of $4 Million Tranche 1 Equity Investment with AMER International (Press release, 11/30/2015)

Mining Quarterly

The latest online version:

Winter 2015 Mining Quarterly

What do copper & gold signal for 2016?

***

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Numbers used for analysis (morning, 12/18/15):

Goldman Sachs Commodity Index

S&P GSCI 307.85, 01/16 contract (intraday low 304.35, on 12/18/2015)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $36.39 per barrel (intraday low $35.72 on 12/18/2015)

Brent crude $ 37.07 per barrel (intraday low $36.41 on 12/18/2015)

Comex copper $2.1055 per pound (intraday low $2.0020 on 11/23/2015)

Comex gold $1,063.5 per ounce (intaday low $1,045.4 on 12/03/2015)

Comex silver $14.045 per ounce (intraday low $13.620 on 12/14/2015)

Canary in the gold mine: Fate of high yield corporate bonds (see explanation below)

iShares iBoxx $ High Yield Corporate Bond (HYG) $79.38 ($78.21 52-week low)

Trouble ahead: HYG < $82...yikes, we're there!

Latest Nevada gasoline prices

Jackson House

Eureka, Nevada

Gold Rebound $1,064 - Where's Santa?

Trouble indicators blinking

Macro drivers: continued concerns about China; U.S. Federal Reserve interest rate trajectory for 2016 & 2017

Wild cards: Fate of high yield bonds, Further oil price decline

Gold bet for next week: pause in $1,060 territory

Merry Christmas Miners!

The markets were so bad last Friday that I decided to delay a report until things got better - they have, a little. December usually enjoys a "Santa Rally" to close the year. Looks like we're still several reindeer short of full team on a pretty rickety sleigh.

One big hurdle is behind us - the Fed's long awaited raise of the benchmark interest rate. Now the question is how many more in the next two years and how big. Expect more volatility as our central bank tightens and others loosen to stimulate moribund economies abroad. This monetary policy divergence supports the U.S. dollar but is not a happy world for our favorite metal. As the U.S. dollar strengthens, it becomes more expensive for foreigners to buy gold in their home currency. From an investment standpoint, The Lustrous One finds itself with few friends for the holidays as money seeks greater reward elsewhere.

What about that lousy Friday?

Every market morning, I record and analyze 22 market parameters including key commodity and stock prices, major currencies and indices. There are many, many more but that's about all the ole Colonel can track without seeing double.

For each parameter, I set a threshold value to signal trouble ahead or blue skies above. Here's a list of 9 lights that flashed red at last Friday's close:

WTI (close) = $35.62 < $40/bbl: Nymex oil at new 7-year low
BRENT (close) = $37.93 < $ 40/bbl: Global benchmark Brent crude at new low
NG = $1.990 < $2/mmBTU: Natural gas futures tumble below $2 and it's almost winter!!
GSCI (close) = 313.95 : Goldman Sachs commodity Index at new low, similar Bloomberg Commodity Index at a 16-year low
HYG = 79.53 < 82: High yield bond market in trouble (see "What's Got the Cat Worried" below)
S&P 500 (close) 2,012.37 < 2,032: U.S equity markets plunge into dangerous waters (the S&P 500 has bearishly fallen back into the "fib" box, see "Market Stats" below)
VIX = 25.35 > 20: S&P 500 Volatility Index jumps26%, often referred to as the "fear index"
USD/RUB = 70.60 > 70: Russian ruble in trouble again
USD/YEN = 120.97 < 122: Japanese yen strengthens to early-November levels (see "Chart to Watch" below)

Ouch!

This morning the "fear index" is lower but just barely under threshold at 19.27. A rally in stocks earlier in the week stalled and we are about 10 points above last Friday (2,025.42 vs 2,012.37). Nymex, Brent and natural gas have punched in lower lows and so have the broader commodity indices. Currencies have stabilized some but the U.S. dollar is trading up from last week. Finally, the fate of the high yield bond market is still keeping market participants on edge.

So what got better in a week? We heard from the Fed on Wednesday - a big uncertainty is now in the rear view mirror. I wouldn't be surprised to see markets on an uptick next week with the S&P 500 closing at 2,100 for the year. What about gold? Here's what I told Kitco News this morning (full input to the Weekly Kitco Gold Survey below):

After Wednesday's U.S. Federal Reserve rate hike, gold is fast approaching its 2013 lows in both euro & yen terms. Gold finds itself just another embattled currency caught in the divergent dynamic of U.S. monetary policy compared to that of the the ECB and Bank of Japan.

My continued fear is that gold losing value to these major devalued currencies signals more near-term downside in US dollar terms, perhaps less than $1,000 per ounce.

On the positive side, gold has now defended two recent excursions below $1,050 per ounce so the trend lower may find some relief next week. My target price is, however, slightly below this morning's price (10:55 AM EST $1,063.9 per ounce).

My vote is down. Target price $1,060 per ounce.

Nuts. Stay tuned.

What's Got the Cat Worried?

This report continues to carry this link to remind us of some potential bumps in the road ahead. Activist billionaire investor Carl Icahn explains why high yields are a scary indicator in this chilling video:

Danger Ahead

We have now crossed the worry threshold (HYG < 82). Please be mindful that Icahn is talking his own book (he is short of high yield bonds). He has also recently invested significantly in Freeport-McMoRan (FCX) which this report views as a positive.

Chart to Watch

Gold price margins from 2013 lows (euro, yen)

A disturbing aspect of gold's recent decline in USD is the concurrent collapse in euro and yen terms.

One of the few accomplishments the yellow metal can boast is staying above its 2013 lows in terms of both currencies. The percent margin above those bottoms peaked in late January and has since trended down with the divergence of US monetary policy from Europe and Japan, and the associated rise of the US dollar. (click on chart for larger image).

Since late-October, the margin's rapid decline relative to yen has been particularly troubling. I maintain that declining value of gold relative to a devalued currency is a red flag. Yesterday, gold price in yen terms was falling fast, closing only 5.2% above its 2013 low. If this margin descends to zero, an equivalent USD gold price suggests sub-$1,000 per ounce given current exchange rates.

Fortunately, this morning puts a pause in this decline.

2013 lows:

879.64 euros per ounce on 12/20/2013
122,443 yen per ounce on 6/28/2013

Friday AM (12/18):

979.82 euros per ounce (+11.4% margin)
129,129 yen per ounce (+5.5% margin)

Market Stats

Here's the scorecard on the stock market, S&P 500 is presently trading at 2,025.42 [UPDATE: Friday close 2,005.55]

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

S&P 500 bear market begins below 20% at 1,707.78

Key "next level" to watch going down is 1,820.66 (low on 10/15/2014, down 14.7%)

For Fibonacci folks the "fib box" is:

50.0% retracement from 8/24 low = 2,000.87

61.8% retracement from 8/24 low = 2,032.45

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

The S&P 500 did finally escape the fib box - now we're back in. [UPDATE: Friday close 2,005.55]. Something to monitor, my bet is a rally to 2,100 by year's end.

Kitco News Gold Survey

My (full) input to the Kitco News Weekly Gold Survey:

My vote is down. Target price $1,060 per ounce.

Discussion:

Another difficult morning for commodities with Nymex oil plunging to another 7-year low ($35.72/bbl) and commodity indices falling below last week's lows. The yellow metal remains stronger relative to key commodities oil, copper and silver but is losing more value to the euro and yen when compared to August averages (relevant because of significant August market corrections on 8/24 & 8/25).

The latter is concerning because a loss of traction with devalued currencies remains a red flag - yesterday, gold denominated in yen was now only 5.2% above its 2013 low (see graph above). Even with today's corrective rebound in USD price, gold is still below the key 1,000-euro level at 979.8 euros per ounce. Gold has been trending lower with respect to both currencies since ECB Draghi's robust stimulus announcement in late-January.

This week's scorecard. Gold is in value deficit compared to the euro and yen August averages (click on chart for larger image):