Gold & Copper Bounce - Are Miners Turning the Corner?

My latest Kitco Commentary: Buy or Sell Gold Now? Check the VAGP First
(8/22/2011)

This morning's...
COMEX Gold price = $1,826.9/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 97.29
Value Adjusted Gold Price© (VAGP) = $1,569.0/oz
COMEX - VAGP = $257.9/oz; gold remains overvalued relative to key commodities


Morning Miners!

It is 5:30 AM. Have a cup of Ruby Red Special. Nothing like Sweet Ruby T to bring a little sunshine into the break room - a 4% bounce in spot copper has her smiling. Even grumpy Old Miner Woden would be happy to see gold back above $1,820/oz. When gold and the red metal move together, the Colonel smiles too...

Gold & Copper Bounce

There has been a real push-pull between the precious and base metals lately but today gold and copper are whistling the same tune. This morning in a CNBC Business News interview,  Charles L. Evans, the ninth president and chief executive officer of the Federal Reserve Bank of Chicago, stated his case for more aggressive monetary policy. COMEX gold which was already in rally mode added another $5/oz on that comment to hit an intraday high of $1,835/oz. It has settled back to trading at $1,826.9/oz but is still up a respectable $35.3/oz from yesterday's close and $121.5/oz above last week's sell-off low.

If you want to explain gold's rebound from a market fear perspective, persistent uncertainty in Europe sovereign debt crisis have pushed gold back up and comments like Evan's suggest the domestic economy is worse than previouly thought. On the other hand, an accommodating Federal Reserve Policy is bullish for base metals as long as the global demand story doesn't fall completely apart. COMEX copper has been trending up since last Tuesday and finds buoyancy in any hint of a third round of quantitative easing (aka QE3) or other monetary stimulus.

The ole Colonel can't sort all this out but I do know that when gold and copper move together it's a much nicer world for the miners than when they don't. Yesterday, the Report pointed out that the gold:copper one-month and three-month correlations are negative (this morning -0.7859 and -0.3737 respectively) which means gold and copper have for the most part have been heading in different directions. In the meantime mining equities have been stumbling around in serious bear country. The two metals need to return to positive correlation as they were in late July to sustain a recovery in the mining sector.

Here are two data points that suggest the metals and miners may be headed for higher ground. The broader markets are now open and our Debt Crisis Index (DCI) has just fallen below the "serious concern" level of 200, presently at 183.9. The DCI was 100 on July 22nd as we established the index to monitor the impact of domestic and European debt woes on the equity, commodity, debt and currency markets. The DCI has been above 200-level for 15 out of the last 17 market days with a peak of 271.0 on August 9th.

The second bit of good news is that the Eureka Miner's Index© (EMI) is above the key 100-level for the third day and has just bumped above its 1-month moving average (120.12 versus 116.79). We need to stay above this average for some time to break the downward spiral for mining equities. The EMI made its bottom of 74.53 on the same day the DCI made its top - August 9th. Both the DCI and EMI are discussed further in the Daily Market Roundup below.


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 120.12, up from yesterday's 110.36 and above the 1-month moving average of 116.79. The EMI set a new low for 2011 of 74.53 on August 9.

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

Gold Value Index (GVI)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 97.29, up from yesterday's 97.19 and above its 1-month average of 95.00. The record high for 2011 was 102.71 set Friday, August 19th. Today's Value Adjusted Gold Price© (VAGP) is $1,569.0/oz or $257.9/oz below the current COMEX gold price.

Although gold prices were on the rise, the GVI initially trended down from 6/7/2010 when it had a value of 100; gold regained value recently reversing the trend, moved sideways for a time and and headed back up with vigor. It is showing signs of being a little "toppy" now that it is around the 100-level again.

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 derivatives are 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 and industrial metal that now competes with gold for investment and as a hedge against fiat currencies.

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 Debt Crisis Watch

July 26th we introduced the Debt Crisis Index (DCI). The DCI is computed in the mornings and at the market close Friday in much the same way we do the EMI & GVI indices. Today, the DCI has a value of 183.9 down from yesterday's 201.7. Our benchmark is 100, the value of the DCI on July 22nd; a bigger number suggests a worsening impact on markets (note 2). This Report has identified an elevated level surpassing 200 is time for serious concern. We are now moving below that level.

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 $100/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 $87.38
ICE North Sea Brent crude $112.162
Spread (ICE- NYMEX) = $24.78 (Friday, $24.68)

Here are the December contracts* with a narrower spread:

NYMEX light sweet crude $87.69
ICE North Sea Brent crude $111.31
Spread (ICE- NYMEX) = $23.62 (yesterday, $23.19)

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

Prices are off their crisis highs and we have $110+ Brent and $85+ NYMEX in December favoring high oil prices throughout the fall and into early winter. My last 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 ON - The miners are on very rough roads; The VIX or "fear index" is above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is seriously below its 200-day moving average of $52.70 (our new key level, 08/22 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The GREEN light is turned on for Commodity Reflation with copper trading comfortably above $3.50/lb

The YELLOW light is turned on for Stable Markets with the VIX above 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 until mid-2013

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

The YELLOW light is turned on our Fuel Gauge with oil above $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, 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 $1.97 in early trading at $87.34 (October contract, most active); Gold is up $20.2 to $1817.5 (December contract, most active); Silver is up $0.168 to $41.120 (September contract, most active); Copper is up $0.0168 at $4.1120 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $14.97; European Molybdenum Oxide (Bloomberg) is $14.50; LME cash seller is $14.97, LME moly 3-month seller's contract is $14.97

Stock Market Morning Update

The DOW is down 42.73 points to 11,496.52; the S&P 500 is down 5.25 points at 1204.83.

Miners are up and at'em.:

Barrick (ABX) $50.44 up 0.46%
Newmont (NEM) $62.41 up 0.42%
US Gold (UXG) $6.07 up 2.71%
General Moly (Eureka Moly, LLC) (GMO) $3.99 unchanged
Thompson Creek (TC) $8.23 up 0.98%
Freeport-McMoRan (FCX) $45.91 up 0.22% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $13.07 up 0.08%
Timberline Resources (TLR) $0.76 up 1.33%

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

ArcelorMittal (MT) $20.97 down 0.71% - global steel producer
POSCO (PKX) $93.17 up 0.04% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 0.90% at $1,632,596.30 (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)

Note 2 - The impact of the U.S. debt ceiling debate affected investment decisions for weeks before its resolution August 2nd and was followed by an S&P credit downgrade. Global sovereign debt issues have been an overhang on markets for many, many months starting with the Dubai crisis in late November, 2009 and spreading to the euro-zone in 2010-2011.

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