Wednesday, July 28, 2010
Will Gold & Copper Ever Make Up? Newmont (NEM) Rocks
It is 6:02 AM. Have a brimming cup of hump day java and let's see which side of the camel's hump we are on today. Copper and gold have been in a domestic quarrel since the red metal hit new highs for the year in April. Maybe it was jealousy but gold dumped copper and went on his separate way. Copper melted in her despair - as the old Neil Sedaka song goes, "breaking up is hard to do."
We got used to seeing copper fall and gold rise through the harrowing days of May and June. The double-dip-gloom-doom headlines crushed the metals & miners and gold couldn't have been happier as investors raced to its lustrous safe haven - revenge is sweet. I awoke this morning to 3-month lows for gold and 11-week highs for copper; the tables have turned indeed. Slightly rosier news from the U.S., Europe and China have investors thinking Armageddon may not be Fall's surprise after all. The red metal has regained her confidence, lost a lot of weight in the declining LME inventories and is looking quite chipper north of $3.20/lb. Gold, on the other hand, plumbs new depths hanging out in the seedy neighborhood of $1160/oz. Will these two ever make up again?
The answer may lie in the recent past. Here is 1-year chart of the copper (green) and gold (red):
Notice the happier days of July through November 2009 when gold and copper rode in the same saddle and galloped out of the Canyon of Recession into the sunlight. Things changed in late November beginning with the first sovereign debt crisis that started in Dubai. This was soon followed by Greece's debt woes and gold and copper began their rocky back-and-forth relation. Copper peaked as things looked to improve in the spring followed by their big breakup in late April. Interestingly, the copper and gold curves look like mirror images since then.
I think the answer to today's question is fairly simple. The ole Colonel believes that if global growth is intact but at a slower pace than originally thought, gold and copper will soon be back in the saddle again. They may not be galloping this time but a steady trot would be welcome. Economists will return to murmuring about inflation risks down the road and gold will be plenty happy to oblige that concern. Copper, thrilled to be with her old beau, will stay high in the saddle with moderate increases in demand from China and the U.S. Here's a Bloomberg article today that makes a case for improving Chinese demand:
Copper Rises to 11-Week High in London on Optimism About Demand in China (Anna Stablum in London, Bloomberg, 07/28/10)
On the other hand, if the U.S. economic news continues to sour we could fall into a period of disinflation (i.e. declining rate of inflation) that could eventually bring us to the dreaded doors of deflation. For example, we learned today that demand for U.S. manufactured durable goods fell in June for a second consecutive month. Signs that the manufacturing sector expansion is slowing are not good and the possibility of disinflation is neither good for gold or copper prices. Copper and gold may stay together for this scenario but they'll be squabbling in a much cheaper flat.
If it's so damn simple, what's the answer Colonel? You know me, I'm a born optimist and to prove it I threw a little silver (which is at 7-week lows) in the buckboard this morning. The ole boy wouldn't do that if he didn't think copper and gold weren't getting together again and fixin' to live high in the Canyon of Better Days. What's gold's refrain?
They say that breaking up is hard to do
Now I know, I know that it's true
Don't say that this is the end
Instead of breaking up I wish that we were making up again
I beg of you, don't say goodbye
Can't we give our love another try
Come on baby, let's start a new
'Cause breaking up is hard to do
(Neil Sedaka, 1962)
By the by, Newmont (NEM) reported a good quarter this morning and that ain't all bad either:
Newmont Second Quarter 2010 Adjusted Net Income Increases 79% to $377 million ($0.77 per share); Increases Quarterly Dividend by 50% (Press release, 7/58/2010)
The Nevada part of the report is here if you are in a hurry to get back to work:
"Nevada produced 420,000 equity ounces of gold at costs applicable to sales of $601 per ounce during the second quarter. Second quarter 2010 production was slightly higher than the year ago quarter due to higher underground production at Midas and Leeville, partially offset by lower mill throughput at Carlin and Twin Creeks and lower leach tons placed. Costs applicable to sales per ounce increased 9% in the second quarter of 2010 from 2009 due to additional surface mining costs related to the 2009 geotechnical event at Gold Quarry.
The Company continues to expect 2010 equity gold production from Nevada of approximately 1.6 to 1.725 million ounces at costs applicable to sales of between $590 and $630 per ounce." (Press release, 7/58/2010)
Enough love stories, let's walk the walk:
The Eureka Miner's Index(EMI) remains above par at 114.76, down from yesterday's 129.77 and a big improvement from the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners (NOTE: at market close Friday, 7/23, the EMI was 112.61)
4-WD is ON - rough but improving roads in the marketplace; The VIX or "fear index" is below 25; metals & miners remain on shaky but firmer timber with benchmark FCX trading in the low-$70s and closing on its 200-day average of $75.4 (our new warning level, 7/27 update), 10-year Treasurys are safely below 4% preserving a low-interest rate environment
The GREEN light is turned back on for Commodity Reflation with copper trading above $3/lb
The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)
The GREEN light is turned back on for Investor Confidence as investors return to equities.
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, U.S. House committee debates miner workplace safety bill
Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)
NYMEX/COMEX: Oil is down $0.38 in early trading to $77.12 (September contract, most active); Gold is up $3.2 to $1161.2 (August contract, most active); Silver is down $0.161 to $17.465 (September contract, most active); Copper is up $0.0290 to $3.2405 (September contract, most active)
Western Molybdenum Oxide is $14.00; European Molybdenum Oxide is $14.55; LME moly 3-month seller's contract is $14.74, LME cash seller is $14.54
The DOW is down 21.72 points to 10,515.97; the S&P 500 is down 4.89 to 1108.95. The miners are mixed:
Barrick (ABX) $40.15 up 0.29%
Newmont (NEM) $55.70 down 0.14%
US Gold (UXG) $4.62 up 0.65%
General Moly (Eureka Moly, LLC) (GMO) $3.31 down 2.93%
Thompson Creek (TC) $9.15 doen 2.35%
Freeport-McMoRan (FCX) $70.72 up 1.27% (a bellwether mining stock spanning copper, gold & molybdenum)
The Steels are down, (a "tell" for General Moly & Thompson Creek):
ArcelorMittal (MT) $31.37 down 2.03% - global steel producer
POSCO (PKX) $106.90 down 1.24% - South Korean integrated steel producer
The Eureka Miner's Grubstake Portfolio is is down 0.49% to $1,360,642.43 (what's this?).
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Headline photograph by Mariana Titus