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

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) 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.

Wednesday, July 20, 2011

Why The Colonel Isn't Worried about the Price of Gold or Copper



Wōdnesdæg
Morning Miners!

It is 5:35 AM. Have a cup of delicious Moon Walk Java. It is hard to believe that astronauts were kicking rocks on the lunar surface 42 years ago today. Speaking of rock kickers, Old Miner Woden just stepped in the break room. Hmm...he seems to be whistling a happier tune, I wonder why he's so cheery on lower gold prices?

Why The Colonel Isn't worried about the Price of Gold or Copper

Yesterday was a good reminder that headline news can dramatically drive markets. During the President's news conference to announce the new "Gang of Six" plan to potentially break the deadlock on U.S. debt limit negotiations, COMEX gold dropped $14.4 to $1,586.9/oz. This came only hours after gold set a new nominal record high of $1,610.70/oz - in fact, the spread between highs and lows yesterday was a shocking $28/oz. In contrast to this flight from a safe haven asset, the broader markets enjoyed the biggest rally of 2011. This morning, COMEX gold has recovered some from the sell-off trading presently at $1,584.4/oz.

COMEX copper, our fearless canary in the global recovery mineshaft, also had a good morning yesterday hitting a 3-month high at $4.4960/lb. She dipped a little on the news and has fallen further today trading currently at $4.4390/lb. This is most likely profit taking because better-than-expected housing start numbers and falling production in some of the larger copper mines should be price supportive going forward. The ole Colonel has said previously that copper should remain above $4/lb for the remainder of the summer.

So if copper looks promising, what about gold? I was actually encouraged that copper and gold fell together because it reinforces the recent positive correlation of two bellwether metals. We started this month with gold and copper in deep inversion (by this report's definition, inversion occurs when both the 1-month and 3-month correlations are negative). Historically this is a very bearish condition for the mining sector. If copper and other base metals are in price descent, the mining sector suffers. If this occurs on rising gold, the gold miners may initially benefit but ultimately are pulled into the vortex if the trend is prolonged. We have had four copper/gold inversions this year and 2011 has been a pretty lousy year for the mining sector as tracked by the the Eureka Miner's Index(EMI) (see below).

The good news is that copper and gold are back together again and the return to positive correlation has been dramatic. Here is today's chart of the 3-month versus 1-month copper/gold correlation:



The magenta line is the movement in correlations from July 1st to this morning; the white arrow indicates the positive ascent of the trajectory. By the numbers:

July 1st -0.4206 (1-month) -0.3900 (3-month), deep copper/gold inversion
July 20th +0.6174 (1-month) +0.5959 (3-month), strong positive correlation

A scatter plot of COMEX copper and gold futures prices is another way to look at this encouraging development. The Colonel updates a model each month (magenta line) based on price movements of copper and gold for the past 3-months. The aqua lines show a statistical boundary for current price variations from the model (yellow wiggly line). The blue line is a 20-day moving average of the copper/gold price pair (a larger and readable chart is shown at the bottom of the blog trade).



The model suggests higher gold prices will result in lower copper prices (i.e. the magenta line goes from the upper-left to the lower-right), a bearish trend. However, recent data (yellow line) have left the statistical boundaries and are now trending from the lower-left to the upper-right (white dotted line), a decidedly bullish trend.

So what, Colonel? Unless the wheels come off either the Europe or U.S. debt wagon, I wouldn't be surprised to see gold price consolidate on further improving news. As long as the pullback isn't too severe and supply/demand fundamentals continue to support copper price, these two metals should avoid further inversions this year. This sets the stage for an improving mining sector. The Eureka Miner's Index(EMI) had a bottom June 27th and the one-month moving average is on a definite uptrend from this low. I think even Old Miner Woden may be whistling a happier tune for the remainder of the year. Market bear turned bull? Stay tuned, pardner.


Daily Market Roundup

Enough talk, let's walk the walk:

Eureka Miner's Index(EMI)

This morning the Eureka Miner's Index(EMI) is above-par at 296.44, down from yesterday's 308.84 and above the 1-month moving average of 266.15. The EMI is down from the high of January 4th and set a new 2011 low on June 27th at 180.03. The 1-month moving average broke its troubling downtrend on July 5th and is now trending up.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record high for the EMI is 816.78 set 01/04/2011; the low was set 6/7/2010 at 50.7. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

200-day averages are used in the EMI to normalize current mining company share price and are updated monthly. Upper and lower trend lines are updated weekly.

Gold Value Index (GVI)

Our newly minted Gold Value Index (GVI) is below-par at 78.49, down from yesterday's 78.91 and below its 1-month average of 79.84. The new high for 2011 is 82.20 set June 23rd. Today's Value Adjusted Gold Price (VAGP) is $1,686.6/oz or $102.2/oz above the current COMEX gold price.

The GVI gauges the value of gold in relation to oil, copper and silver independent of currency. These three commodities were chosen for relative value comparison because 1) oil is a common cost element for all miners, 2) copper has proven to be a reliable proxy for global growth and 3) silver is a precious metal that now competes with gold for investment and as a hedge against fiat currencies.

Although gold prices have been on the rise, the GVI has trended down since 6/7/2010 when it had a value of 100; gold regained value recently reversing the trend but now appears to be moving sideways.

The Value Adjusted Gold Price (VAGP) is a level that supports current oil, copper & oil prices based on historical commodity norms. If the daily COMEX gold price is below the VAGP, then gold is undervalued; if above, overvalued.

Daily Oil Watch

Latest Nevada Fuel Prices

On February 1st we identified North Sea Brent crude oil as a good barometer for the developing crisis in the Middle East and North Africa (MENA). It is now above $110/bbl with a large spread from the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX (see note 1). The Report normally follows the latter but will track both until things settle out in the region.

Here are the key front-month contracts as of this morning:

NYMEX light sweet crude $98.99
ICE North Sea Brent crude $118.36
Spread (ICE- NYMEX) = $19.37 (Yesterday, $20.01)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $99.82
ICE North Sea Brent crude $118.35
Spread (ICE- NYMEX) = $18.53 (Yesterday, $18.61)

* NYMEX futures contracts have rolled forward, we now show September and November for a 2-month look-ahead

Prices are off their crisis highs but we have $115+ Brent and $95+ NYMEX in November favoring high oil prices throughout the summer and into late fall. My December prediction that we would see NYMEX $100/bbl oil before the Fourth of July came true on February 23rd.

Eureka Outlook Dashboard

4-WD is OFF - The miners are on smoother roads but caution is in the air; The VIX or "fear index" is below 25; bellwether Freeport-McMoRan (FCX) remains above its 200-day moving average of $52.22 and 150-day moving average of $53.40 (our new key levels, 07/11 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 comfortably above $3.50/lb

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

The YELLOW light is turned on for Inflation Watch The Federal Reserve phased out buying Treasurys June 30th (aka QE2) but will maintain low interest rates for now

The YELLOW light is turned back on for Investor Confidence with some investors adverse to commodity-sensitive equities

The ORANGE light is turned on our Fuel Gauge with oil above $90

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, R&R Partners parts ways with Nevada Mining Association, Obama budget includes mining royalty , Mineral commission fights consolidation, Democrats seek to repeal mining tax from the constitution, Rhoads, Ellison oppose repeal of net proceeds tax, Proposal could change net proceeds tax, 'You get to deduct WHAT???' Nevada lawmakers ask gold miners

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

Commodity Market Morning Update

NYMEX/COMEX: Oil is up $1.13 in early trading at $98.99 (August contract, most active); Gold is down $16.7 to $1584.4 (August contract, most active); Silver is down $1.681 to $38.540 (September contract, most active); Copper is down $0.0290 at $4.4390 (September contract, most active)

Western Molybdenum Oxide is $15.06; European Molybdenum Oxide is $14.65; LME cash seller is $15.06, LME moly 3-month seller's contract is $15.06

Stock Market Morning Update

The DOW is down 8.21 points to 12,579.21; the S&P 500 is up 1.26 at 1,327.99

Miners are mixed:

Barrick (ABX) $48.32 down 0.49%
Newmont (NEM) $57.53 down 0.38%
US Gold (UXG) $6.89 down 1.99%
General Moly (Eureka Moly, LLC) (GMO) $4.48 unchanged
Thompson Creek (TC) $9.97 down 0.30%
Freeport-McMoRan (FCX) $55.90 down 0.71% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $15.82 up 1.80%
Timberline Resources (TLR) $0.79 unchanged

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

ArcelorMittal (MT) $31.81 down 0.31% - global steel producer
POSCO (PKX) $108.36 up 1.83% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 0.353% at $1,766,604.72(what's this?).

Cheers,

Colonel Possum

Note 1 - West Texas intermediate (WTI), also known as Texas light sweet, is a type of crude oil used as a benchmark in oil pricing and is the underlying commodity of New York Mercantile Exchange's (NYMEX) oil futures contracts. The price of WTI is often referenced in North American news reports on oil prices, alongside the price of North Sea Brent crude (source: Wikipedia)

Headline photograph by Mariana Titus

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

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