"The history of Eureka lies in its future." - Lambert Molinelli, 1878


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Monday, April 13, 2009

What’s up (or down) with Gold?

Morning Miners!

The Colonel and an old miner were having a brew at the Keyhole the other day. I showed him my charts at the bottom of this page and declared with some frustration, “Gold is sometimes harder to figure than a woman’s scorn!”

“Gold’s not hard, it’s simple!” the ole miner laughed, “You throw a few bars of the stuff under your bunk and sleep sweet dreams at night with a chambered round in your 1911. In bad times, women and luck might leave you but your gold is there to stay.”

I appreciate his sentiment. Unlike mercurial stocks and bonds, the value of gold will not drop to zero. It is also a lot more satisfying to catch a lowdown high-grader running out your back door than receiving an e-mail from the SEC that informs you your life savings just evaporated like spit on a hot ponzi-scheme sidewalk.

The safe haven aspect of gold is an important part for understanding price fluctuations and I’d like to close on that thought. First, let’s look at some of the other pieces. Mining companies make money on the difference between the cost of producing an ounce of gold and the price of bullion. They can’t control the price so managing costs becomes their focus. As you know, that has been getting tougher and tougher. You have to move more tons of rock for an ounce of gold; energy costs are volatile, new geopolitical risks loom on the horizon and miners still think they’re entitled to an honest day’s pay!

On the supply-side, gold production in the traditional “Big Four”, South Africa, the U.S., Australia and Canada, has been on the decline for much of the decade. Global gold mining output fell 4% in 2008; South Africa’s percentage decline was the steepest since 1901, dropping 14%. New supply sources are popping up in Russia, Ecuador, Peru and a smattering of other global nooks and crannies. China has become the new No. 1 producer but overall there are few new rich deposits and that puts a serious crimp on future supply.

For the demand piece there are three legs to the stool; industrial uses, jewelry and investment. Products fabricated from gold, such as electronics and medical devices, have seen a decline due to higher prices and a slumping global economy. In 2008, fabrication demand dropped to 77.4 million ounces from 82.9 million in 2007. Demand from India, the biggest consumer of gold for jewelry has dropped off sharply in the last year.

In recent times, investment demand has taken up the slack between fabrication and jewelry demand. It has been going up for eight years and accelerated in the last two. In 2008, investors bought 43.3 million ounces, more than half used for fabrication in the same year. One of the most popular ways to buy gold is through the ETF or Exchange Traded Fund. It trades like a stock but the investor doesn’t take possession of the gold, it resides safely in a London bank. The ole Colonel likes this approach and occasionally buys the SPDR Gold Shares (GLD). This beats chucking bars under the bunk and saves ammunition for target plinking.

Putting all the pieces together, which tail is wagging the dog lately? It seems the safe haven play has trumped the fundamental issues of supply and demand over the last several months. Gold broke the magical $1000/oz in February and then see-sawed downward to $800 territory after a 5-week rally in the broader markets. The appetite for risk has improved and money is slowly leaving defensive plays like gold and returning to equities. The ole Colonel believes this may reverse again as more earnings reports roll out this month. I’ll put my money where my mouth is:

Gold sees $929 before $844 on or before 5/15/09

Now if some country or the IMF starts dumping gold, the Colonel will replace money with foot!

One more for the Beer Derby (see right column above the Moly chart)!

Enough talk, let's walk the walk:

Oil fell below $50 in early trading to $49.31; the dollar ("Dixie" or .DXY) is down 0.60% to 85.025 and the commodity index (.CRB) follows, down 0.70%.

Gold is up $13.9 to $896.6 (June contract); Silver is up $0.435 to $12.765; Copper continues its run, up $.0485 to $2.125; Molybdenum breaks below $8 to $7.95.

The DOW is down 67 points to 8016.55; the S&P 500, down 4.19 points to 852.37. Miners are mostly happy:

Barrick (ABX) $29.21 up 2.28%
Newmont (NEM) $41.66 down 0.29%
General Moly (GMO) $1.30 up 2.36%
Quadra (QUA.T) C$6.59 up 4.60%
Freeport McMoran (FCX) $44.91 up 1.84% (a bellwether mining stock spanning gold, copper & molybdenum)


Colonel Possum

Data Source for gold discussion: Investor’s Business Daily, 4/6/09

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