Wednesday, July 7, 2010
Gold Hits 6-Week Low - What's Going On?
It is 6:10 AM. Have a cup of hump-day-sure-got-here-quick java and let's get to work. London spot gold hit a six-week low this morning at $1184.20/oz and some of you may be wondering what has taken some of the glitter off our pan dust lately. There are at least three explanations for this decline and my favorite is the liquidation theory.
For many months there has been a bet against the euro and an upsurge in gold investment. As the euro now grows stronger, many global investors are dumping gold in favor of a U.S. Treasury safe haven causing the 10-year note to stay in sub-3% yield territory. Not to worry, there is a chorus of euro-doubters that predict that the Euro-zone's embattled currency will resume its downhill march to parity with the U.S. dollar. This is a gold bullish group; currency instability is typically good for gold.
Another theory is macro-economic. Some of the steam is coming off global growth now that countries are throwing fewer stimulus logs in the boiler which may lead to a period of disinflation (disinflation is a slowing rate of inflation). If this continues for too long, inflation becomes deflation and we may really be in the soup (or soup line). Disinflation is usually bearish for gold and commodities; deflation is historically supportive of gold but may portend the end of the world - at least in the eyes of gold bugs. Gold bugs are a curious lot, I often wonder what they will do with all their gold as they feverishly celebrate the arrival of Armageddon.
Finally, gold may be coming down because it is summer, the least lustrous period for our lustrous friend. This argument, although historically correct, seems a little weak to me. With all the central bank and safe haven investors in the gold market these days does the gold-buying cycle in in big consumer nations like India really have the impact on gold price that it once did?
Whatever theory you prefer it appears that commodities are in a rough patch. Whether this is just summer road repair on the highway to global recovery or a detour to a county road that leads us to double-dip recession (or worse) is at the center of heated debate. Being an optimist, I prefer to wait for the road crew ahead to flag us on to smoother roadways - we may be waiting for here awhile but hopefully not directed to a double-dipper detour. Too early to tell buckaroos.
One thing for sure is the carnage we've experienced to date in commodities important to local mining. I thought I'd share a few of my charts with you to illustrate how the ole Colonel reads the tea leaves in these markets.
Each chart below is a scatter plot of recent NYMEX/COMEX futures prices (last 3 months) for a commodity (e.g. copper) versus a reference commodity (e.g. gold). I update my model every month (magenta line) for each commodity pair. The aqua lines show a statistical boundary for current price variations (dark wiggly line) from the model. The most recent prices (last 20 days) are the yellow wiggly line. The blue line is a 20-day moving average of these commodity prices.
Let's start with COMEX copper versus COMEX gold (a larger, more readable chart appears at the bottom of this blog page):
The first thing to note is that the above lines move from the upper left to the lower right of the chart. This is called an "inversion" where the price of copper has (on average) been in decline as gold price has increased over the last three months. The most recent copper prices (yellow) are at the bottom right-hand corner struggling to get above the key $3/lb level. More typically, copper and gold move together and the lines would go from the lower left to the upper right. This is the case for COMEX copper when compared to NYMEX oil:
I call this the "China Chart" because oil and copper prices are heavily influenced by Chinese demand for these commodities. You'll remember this is the reason copper and oil are included in the Eureka Miner's Index (EMI - what's this?). Again we see both copper and oil prices are in decline with the recent prices lying in the lower left corner. The plot of NYMEX oil versus COMEX gold is similar to our first; oil and gold are experiencing inversion - almost never a good sign for markets.
Finally, here is a chart of COMEX silver versus COMEX gold:
Silver nearly always tracks gold but in rougher times the ratio of gold to silver (Au:AG ratio) increases. On this chart, an increasing Au:Ag ratio causes the slope of the model lines to "flatten". This means that a change in gold price does not yield as large a change in silver price as we more typically expect when the slopes are steep and commodities are on a roll.
Ideally we would like to see all four charts without inversion and with nice steep slopes (i.e. small changes in the reference commodity yielding large changes in the commodity of interest). The one possible exception is oil versus gold unless you are an oil trader. For that case, a moderate slope is the best for gold miners so that the cost of oil doesn't outpace the price increase of their product.
Thanks for taking a quick tour with me of my world. The good news is that oil/gold and copper/gold inversions have peaked and are now diminishing. A return to positive slopes for both may mean the flagman will wave us ahead in the coming months for smoother travel.
Enough talk, let's walk the walk:
Our newly minted Eureka Miner's Index (EMI - what's this?) is sub-par at 83.31; at bit down from yesterday's 84.75 and but a big improvement from the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners.
4-WD is ON - rough roads in the marketplace; The VIX or "fear index" is above 25; metals & miners remain on shaky timber with benchmark FCX trading in the the low-$60s well below its 200-day average of $76 (our new warning level), 10-year Treasurys are safely below 4% preserving a low-interest rate environment
The YELLOW light is turned back on for Commodity Reflation with copper trading slightly below $3/lb
The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)
The YELLOW light is turned back on for Investor Confidence as further market corrections are likely
The GREEN light remains turned on our Fuel Gauge with oil below $80
A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions &
General Moly Mt. Hope Water Rights
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is up $0.97 in early trading to $72.95 (August contract, most active); Gold is down $1.5 to $1193.6 (August contract, most active); Silver is down $0.042 to $17.815 (July contract, most active); Copper is up $0.0220 to $2.9930 (September contract, most active)
Western Molybdenum Oxide is at $16.00; European Molybdenum Oxide is at $14.50; LME moly 3-month seller's contract is $14.97, LME cash seller is $14.74
The DOW is up 86.51 points to 9,830.13; the S&P 500 is up 10.97 to 1039.03. The miners are up except for the senior gold diggers:
Barrick (ABX) $42.97 down 0.02%
Newmont (NEM) $58.57 down 0.09%
US Gold (UXG) $4.50 up 0.45%
General Moly (Eureka Moly, LLC) (GMO) $3.01 up 1.28%
Thompson Creek (TC) $8.81 up 0.57%
Freeport-McMoRan (FCX) $60.68 up 2.52% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are up, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $28.25 up 0.46% - global steel producer
POSCO (PKX) $98.88 up 0.59% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is up 0.61% to $1,304,605.30 (what's this?).
Write Colonel Possum at email@example.com for answers to your questions or to request e-mail updates on the market
Headline photograph by Mariana Titus