"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.

Thursday, August 12, 2010

Gold Gets His Mojo Back - COMEX $1218.5

Morning Miners!

It is 6:05 AM. Our favorite Norseman got to the break room early and heated up a fresh pot for Thor's Day if you're wondering what the campfire in the parking lot is all about. I've got to explain to that ole boy that electricity comes down wires just as easily as clouds and is a lot safer than lighting fires everywhere. Other than a few ashes in my cup, Thor's java is mighty good.

The ole Colonel is starting to feel good too, at least about these goofy markets. Now, I know you're going to tell me there are even more lousy headlines this morning about poorer than expected jobless claims and new debt jitters in Europe. Pardner, we've seen this movie and know the actors - isn't this about the fifth rerun? I get my headlines from the metals and they are telling a different story this AM. We will probably see another sell-off today in the broader markets but gold and copper are holding hands and looking for bluer sky.

COMEX gold hit a morning high of $1218.5/oz which is more than 5% up from its July intraday low of $1159.3/oz (December contract, most active). Some will say this is just fear returning to the sluice but copper is up too (COMEX copper morning high $3.31/lb). Both have pulled back a tad ($1215.6/oz & 3.26/lb) but are still in pretty green pasture. Allen Sykora of Kitco News wrote an encouraging article about copper yesterday afternoon:

Any Damage to Copper from Slowing Economy May Be Limited (Allen Sykora, Kitco News, 8/11/2010)

Mr. Sykora points out that slowing economic growth in the U.S. and China have taken a hit on copper prices but there are analysts expecting both prices and demand to pick up up again later this year and next. Some are predicting a global supply/demand deficit in 2011. Even though the nearest copper mine to Eureka is in Ely, the fate of copper is a reliable indicator for the the prospects of non-precious metal mining in Northern Nevada. Copper remains this Report's venerable canary in the global recovery mineshaft.

As we have said since late July (Will Gold & Copper Ever Make Up?), gold & copper need to fly on the same upward flight path to sustain any optimism for the metals complex. This has not been the case for some time but we may be starting to see some improvement. This morning's move has lifted the 1-month rolling correlation of copper & gold ever closer to positive territory. The 3-month correlation is still quite negative but up a good bit from the inversion peak. Here are the numbers (see Note 1 for further explanation):

Cooper & Gold Rolling Correlations:

This morning (8/12/2010):

1-month -0.063
3-month -0.533

At the inversion peak (6/24/2010):

1-month -0.340
3-month -0.867

As the Report showed in China to the Rescue?, one way to visualize the copper/gold relation over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations (aka "rho") as shown below:

In this case we start out on 4/27/10 when both copper and gold were positively correlated (i.e. in the "+,+" quadrant). Incidentally, this is the day after this year's S&P 500 high and shortly after COMEX copper hit its high of $3.5840/lb (4/12/10). Unfortunately we soon descended into negative territory as the financial crisis in Europe worsened (blue line). Presently we remain in the "-/-" quadrant for both the short and near-term correlations - the magenta line and arrow show the most recent data and direction. Today's gold bounce helps move the short-term relation, starting a return trip to the "+,+" good lands via a trip through "+,-" country first.

The broader markets are now open and predictably the DOW and S&P 500 are being taken to the woodshed again. The miners are doing a bit better and that causes the ole Colonel to smile. I just threw a little Thompson Creek (TC) into the buckboard betting things aren't quite so gloomy-doomy in metals & miner's camp after all.

Stay tuned.

Enough talk, let's walk the walk:

The Eureka Miner's Index(EMI) remains above par at 111.80, a slight drop from yesterday's 113.32 but still considerably above the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times (or at least better times) for the metals & miners.

4-WD is ON - rough roads in the marketplace; The VIX or "fear index" remains above 25; metals & miners are still on shaky timber with benchmark FCX dropping to the high-60s after being near its 200-day average of $75.3 (our new warning level, 8/05 update), 10-year Treasurys are safely below 4% preserving a low-interest rate environment but there is some deflationary caution now that we are sub-3%.

The YELLOW light is turned back on for Commodity Reflation. Although copper is trading above $3/lb, the 10-yr T-Note is solidly below 3.00%

The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)

The YELLOW light is turned on for Inflation/Deflation Watch as the Federal Reserves resumes buying back Treasurys

The YELLOW light is turned back on for Investor Confidence as the bond markets signal trouble ahead

The GREEN light is turned on our Fuel Gauge with oil dropping 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 $1.67 in early trading to $76.35 (September contract, most active); Gold is up $16.4 to $1215.6 (December contract, most active); Silver is up $0.088 to $17.99 (September contract, most active); Copper is up $0.0105 to $3.2645(September contract, most active)

Western Molybdenum Oxide is $14.25; European Molybdenum Oxide is $15.45; LME moly 3-month seller's contract is $15.65, LME cash seller is $15.44

The DOW is down 59.86 points to 10,318.97; the S&P 500 is down 8.01 to 1081.46. The miners are a little happier than yesterday:

Barrick (ABX) $43.08 up 1.60%
Newmont (NEM) $57.44 up 2.50%
US Gold (UXG) $4.79 down 2.79%
General Moly (Eureka Moly, LLC) (GMO) $2.97 unchanged
Thompson Creek (TC) $9.09 down 0.44%
Freeport-McMoRan (FCX) $69.58 down 0.66% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are struggling, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $30.16 down 2.01% - global steel producer
POSCO (PKX) $103.14 down 0.58% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 0.34% to $1,351,871.95 (what's this?).


Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Note 1: (Adapted from the 8/4/10 blog, China to the Rescue?) Most of the time the metals and gold are "positively" correlated or in other words, their price movements tend to be in the same direction. Correlation is a calculation derived from the price histories of two commodities and has a value from -1 to +1. A correlation of "zero" implies no directional relation and the two prices are said to be uncorrelated. Silver and gold almost always have a high "positive" correlation. On 8/4/2010, the 3-month correlation of gold and silver was 0.7485 with a high of 0.9783 last Fall (10/5/09).

A "negative" correlation occurs when two prices move in opposition which has been the case for copper and gold for the last several months. Today the 3-month correlation (or "rho") of copper and gold is -0.5334; a peak inversion of -0.8571 occurred in June (6/24/10).

Headline photograph by Mariana Titus

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