The Eureka Miner: Zorro Marks the Red Metal

Metal art by Mariana Titus

*** BREAKING NEWS *** COMEX gold just touched $1,801.0/oz moments ago (11:45 EDT December contract most active)

My latest Kitco Commentary: Is Gold Overvalued? (08/08/2011)

Wōdnesdæg
Morning Miners!

It is 5:36 AM. Have a cup of Old Miner Woden's Bear Claw Coffee. Yes, it's "Woden's Day" and that means gold will go up and the markets, down. Our market bear wouldn't have it any other way. Our perma-bull Ruby T had her day yesterday with a nearly 5% jump in the S&P 500 - so it goes when volatility is over 40...

Zorro Marks the Red Metal

COMEX gold is climbing again in morning trading but below yesterday's high of $1,782.50/oz. Nonetheless, it is presently up $31.2 at $1,744.4/oz. Before a new record is set, let's pause a moment and see what's going on with copper.

With the dramatic turn in the markets, gold headed north and copper high tailed south falling below the key-level of $4/lb. This morning it is struggling back, up $0.0250/lb at $3.9865/lb. With any luck a copper reversal is underway (higher highs & lows, higher close - the red metal needs to close above $3.9700/lb today).

Another sign supporting a pending reversal is the elevated gold:copper ratio (see Gold Value Index (GVI) discussion below, the GVI just broke par):

Gold:Copper Ratio

Today (8/10/2011) 443.5 lbs/oz
"Flash Crash" Redux (6/7/2011) 448.6
Financial Crisis (12/5/2008) 573.2

The ratio is nearly as high as the 2010 "Flash Crash" Redux when the DOW closed below the "Flash Crash" low a month earlier. I doubt we'll see the 500+ levels when there was fear of a run on the banks at the height of the 2008 financial crisis (copper fell below $1.50/lb). More "historically normal ratios" are in the mid-300s.

There is more than hope and numbers for a little optimism. Reuters reports today that China imports surprised to the upside together with support from a weak dollar and the latest Fed input:

METALS-Copper perks up on Fed, weak dollar, China imports (Susan Thomas, London Reuters, Wed Aug 10, 2011 10:27am GMT)

According to Susan Thomas, RBC Capital Markets said in a research note:

"Barring a further panic in the equity markets, we would venture to say that we've likely witnessed the lows in base metals for 2011 and higher prices are now in order into year end..."

The ole Colonel made a bet that copper would remain above $4/lb this summer and then head for higher ground in the fall. The theory was that copper supply restrictions and lower production would trump falling demand expectations lending support for higher prices. My first prediction failed but not by much (so far).

I discussed the technical reasons for my predictions in my July 28th Kitco commentary. That piece showed a gold:copper correlation map to demonstrate the dramatic trajectory that moved gold and copper from deep inversion (by my definition, when both the 1-month and 3-month correlations are negative) to a state of high positive correlation (note 3). At the time, this was a very bullish indication for copper prices going forward. Here is the same chart of 3-month versus 1-month correlations updated through last Friday's close (8/5/2011):

The movement or "trajectory" now resembles the mark of Zorro's sword - a big "Z." The lower leg of the "Z" is older data (blue line) from the the May-June malaise when copper was held captive at a lingering negative 3-month correlation. This changed abruptly after July 5th with a sharp rise followed by a sword swipe to the upper left quadrant (recent data, magenta line). This top leg (August 2nd to 5th) occurred as markets were pummeled by the U.S. credit downgrade and deteriorating sovereign debt crisis in Europe. Presently, the trend continues with falling 1- and 3-month correlations:

Recent Gold:Copper correlations

Peak (8/01/2011) +0.8531 (1-month) +0.8091 (3-month)
Today (8/10/2011) -0.8381 (1-month) +0.3820 (3-month)

At this pace, it is possible that the gold:copper correlation will fall back into deep inversion, a very bearish sign for future copper prices. With the present market volatility, the trajectory could also return to positive territory for both short and midterm correlations. If today marks a key reversal for copper, Zorro's sword may take another swipe to the right, a bullish sign.

Bring on the red metal bulls. Stay tuned, pardner.

By the way, LME molybdenum futures ticked up yesterday to $mid-15/lb territory (ses 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 below-par at 82.02, up from yesterday's 74.53 and below the 1-month moving average of 237.93. The EMI is down from the high of January 4th and sets a new 2011 low of 74.53 on August 9th. The 1-month moving average broke its troubling downtrend on July 5th, trended up for awhile but is now dangerously trending down. Dropping below the 100-mark is a very bearish development.

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)

The Gold Value Index (GVI) is above-par at 100.7, up from yesterday's 98.94 and well above its 1-month average of 83.14. This is another new high for 2011 breaking above the old record of 98.94 set August 9th. Today's Value Adjusted Gold Price (VAGP) is $1,468.2/oz or a startling $301.2/oz below the current COMEX gold price.

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, moved sideways for a time and and is heading back up with vigor. It is showing signs of being a little "toppy."

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

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 Debt Crisis Watch

July 26th we introduced the Debt Crisis (DCI) Index to track the debt squabble in Washington and its impact on the bond, equity, currency and commodity markets. The Report will now carry it forward to track the bigger picture of domestic and global sovereign debt worries (note 2).

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 245.6 down from yesterday's 272.1. 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 dangerously above 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 $80.51
ICE North Sea Brent crude $104.70
Spread (ICE- NYMEX) = $24.19 (Yesterday, $22.54)

Here are the November contracts* with a narrower spread:

NYMEX light sweet crude $81.35
ICE North Sea Brent crude $104.62
Spread (ICE- NYMEX) = $23.09 (Yesterday, $21.85)

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

Prices are off their crisis highs and we have $100+ Brent and $80+ NYMEX in November favoring high oil prices throughout the summer and into late fall although there are now definite signs of weakening prices. 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 ON - The miners are on back 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 $52.93 (our new key level, 08/05 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 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 $1.21 in early trading at $80.51 (September contract, most active); Gold is up $26.4 to $1769.4 (December contract, most active); Silver is up $0.472 to $38.335 (September contract, most active); Copper is up $0.0195 at $3.9895 (September contract, most active)

Western Molybdenum Oxide (Infomine) is $15.42; European Molybdenum Oxide (Bloomberg) is $15.42; LME cash seller is $14.25, LME moly 3-month seller's contract is $14.80

Stock Market Morning Update

The DOW is down 362.86 points to 10,876.91; the S&P 500 is down 35.80 points at 1,136.73

Miners are mixed:

Barrick (ABX) $47.94 up 0.42%
Newmont (NEM) $55.79 up 0.70%
US Gold (UXG) $5.97 down 4.63%
General Moly (Eureka Moly, LLC) (GMO) $3.79 down 10.19%
Thompson Creek (TC) $7.55 down 5.03%
Freeport-McMoRan (FCX) $44.31 down 1.64% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.54 up 0.08%
Timberline Resources (TLR) $0.74 unchanged

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

ArcelorMittal (MT) $22.04 down 5.43% - global steel producer
POSCO (PKX) $91.87 down 5.43% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is down 2.25% at $1,563,450.41 (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. The quality of U.S. fiscal plans going forward will determine if there is a credit downgrade in the wings. 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.

Nore 3 - I say that gold and copper prices are “inverted” when both short-term and mid-term correlations are negative, typically a very bearish condition (lower-left quadrant marked by the red box “-, -“). The upper left quadrant is green pasture for metal bulls (marked by the green box “+, +”) because when gold and copper prices move together, their price ratio is least disturbed. This leads to periods of stability. A return to mixed correlations in either the upper-left (“-, +”) or lower-right (“+, -“) is generally a warning sign (denoted by the yellow boxes) of pending divergence in the gold:copper ratio.

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