Johnny & the Colonel Talking Silver (Christmas 2011)
Eureka, Nevada
Follow the ole Colonel on twitter @Eurekaminer
Next Week Target Gold Price: $1,700 per ounce, Target Silver Price: $17.54 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!
With novel coronavirus (covid-19) accelerating its spread through Europe, the U.K. and now North America the ole Colonel wonders what happens next - especially after 1,000 point swings in the Dow Jones Industrial Average and gold that saw its greatest weekly gain since 2009. Before we look at the details, I found solace by remembering the Christmas of 2011. Mariana and I had Johnny Brown over for a BBQ and he and I discussed one of our favorite topics - the price of silver.
2011 was one of the most volatile years in recent memory for commodities. Arab Spring propelled oil to $100+ per barrel then silver soared to nearly $50 per ounce. The U.S. August debt crisis followed as copper crashed and gold reached an all-time high in $1,900 territory. Sock markets were roiled throughout that year. Yet by BBQ time peace had returned to markets and it was a time for reflection. For the books: Comex gold traded around $1,600 per ounce,copper enjoyed $3.4 per pound and silver found comfort at $29 per ounce.
2011 is a lesson that as bad as this epidemic becomes to human life and markets - this too shall pass. I've roughed out some numbers given the latest reporting of the covid-19 spread within our borders (see Understanding Coronavirus).
It is noteworthy that gold is still in $1,600 per ounce pasture but copper and silver have traveled through some badlands in the last 8-plus years (see Silver Watch below).
Presently, Comex April gold is trading at $1,662.8 per ounce after making a high of $1,690.7 before the monthly jobs report.
The Labor Department had good news although it hasn't registered covid-19 impacts yet. A robust 237,000 jobs were added in February versus an expectation of 175,000. Headline unemployment dropped to 3.5%. Average hourly wages increased a healthy 0.3%. We go into this epidemic with a strong economy.
Here's how I explained my outlook to the Kitco News Weekly Gold Survey this morning:
With stocks tumbling globally, a surprise 50 basis point Federal Reserve cut and a very positive but backwards- looking jobs number, it is hard to divine where markets will head next. As covid-19 accelerates its spread throughout Europe and North America, the magnitude of its impact on economies remains unknown.
This creates a nearly perfect environment for further rallies in gold price. Plummeting Treasury yields and anticipated Fed actions have weakened the dollar to January 2019 levels - a real boost to dollarized commodities. Very low inflation expectations have fallen less rapidly than 10-year yields resulting in negative real rates exceeding 50 basis points - a windfall for a non-interest earning asset like gold. Investment in the lustrous metal is also supported by increasingly negative rates in Europe and Japan.*
Finally, gold value relative to the benchmark S&P 500 peaked this morning near levels not seen since the 2016 Presidential election [see Chart to Watch below].** Until there is better understanding about the viral damage to human life and markets, gold will continue an upward trend to $1,800 per ounce, perhaps higher. At the present pace, it is likely that Comex gold will test the $1,700-level next week with embattled silver following to $17.54 per ounce. It is noteworthy that the gold-to-silver ratio is at a new high this morning (96.9) [Silver Watch].
* 10-year U.S. real rate -0.61%; 10-year bonds: German Bund -0.74%, France -0.37% and Japan -0.15%;
** AUSP 0.5723 this AM; last AUSP high was 0.5409 December 21, 2018, before election ~ 0.6
This morning, Comex copper remains bravely above $2.5 at $2.5540 per pound - up 0.6% for the week.
Here's a good beer bet. Over the last month, which of these five market variables had the least price volatility (i.e. wiggle about average price)? I'm guessing you might not have picked the red metal.
Oil (Nymex WTI) 5.6%
Comex silver 3.3%
Comex gold 2.4%
Japanese yen 1.5%
Comex copper 0.88%
One possible reason is that 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 1.0186 below the coronavirus peak of 1.8399 set February 11 (click on chart for larger size). We may be off the second peak signaling the first phase of the epidemic is 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.
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.
Understanding Coronavirus (Covid-19)
The U.S. has been behind other countries in assessing how many folks are inflected with covid-19. There are two reasons: the illness came to our shores later than most and there has been a delay in the distribution of testing kits. The latter is fortunately being remedied by the CDC and independent research labs so we'll have a better handle in the weeks ahead.
In the meantime, we can rough out some numbers based on the experience of other countries. I looked at very recent data (source: Bloomberg News, 3/7/20) from the top six countries with covid-19 in their populations. By country, I computed the death rate to be in a range of 0.65% (South Korea) to 3.96% (Italy). China, which has the highest number of infections (over 80,000) has a rate of 3.84%.
In the U.S. the CDC reports (as of 3/6/20) that there are 11 states with covid-19 for a total number of 164 cases and 11 deaths. This works out to be a death rate of 6.7% which is out of the global reporting range. We can reasonably assume this is due to under-reporting of cases for the reasons mentioned. Since the U.S. deaths are confirmed, the global range applied to U.S. deaths computes the number of cases to be between 277 to 1,692. CDC's Dr. Anthony Fauci used a 2% death rate for rough calculation in a recent press conference. That puts the number of cases at 550 not 164 [Sunday midday update: the number of cases is reported to now be 475 with 19 deaths. The 2% rule would suggest the number of cases is closer to 950].
This number crunching is important because garden variety flus has a much lower death rate, around 0.1%. A sobering thought and the reason why the world is reacting the way it is. Italy just cordoned off an area in the Lombardy region of 10 million people. Something to think about in the weeks ahead.
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 above $17 per ounce but continues to show 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 96.91 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 continues its rally.
At 96.91, 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 further this week, currently a very unattractive 0.42 (i.e. on average, the daily % rise or fall of silver price is beta times the % change in gold price). You want a high beta (i.e. greater than 1.00) when gold rallies higher.
(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 falling at a slightly slower pace than 10-year U.S. Treasury yields resulting in negative real rates (see Weekly Summary Charts] - a bullish trend for a non-interest earning asset like gold.
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 1.41% as of Wednesday just above a new low on the chart of 1.41% established February 28, 2020.
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):
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 0.5723 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 and 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 solidly above trend].
Predictions aside, 2020 will no doubt be an exciting year in the markets. Get ready for a roller-coaster ride, pardner. I remain bullish gold!
The Colonel's Latest Kitco News Commentaries
Please checkout my latest Kitco News columns on the stunning relationship of copper and gold prices with interest rates:
Copper, gold & the coronavirus (2/18/2020, Kitco News)
Leading indicator for U.S./China trade - copper, gold & yuan (1/13/2020, Kitco News)
Is Jeffrey Gundlach right about copper, gold & interest rates? (12/23/2020, Kitco News)
Gundlach indicator: stable copper-gold means low yield volatility (11/11/2019, Kitco News)
Gundlach Indicator: treasury yield and copper-gold ratio plummet (9/03/2019, Kitco News)
Robust Revival of Gundlach's 10-yr Treasury Relation with the Copper-Gold Ratio (6/17/2019, Kitco News)
Cheers,
Colonel Possum & Mariana
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