The Colonel's Friday Thoughts on Copper & Gold

My Latest International Business Times commentary: What is Up (or Down) with Silver and Gold?
(10/6/2011)

My latest Kitco commentary:
What is the Value of Gold? India Beckons (10/03/2011)

This morning's...
COMEX Gold price = $1677.5/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 100.65
Value Adjusted Gold Price© (VAGP) = $1,392.7/oz
COMEX - VAGP = $284.8/oz; gold is trading at a premium; key gold-referenced commodity ratios are at recessionary levels but trending down which is bullish (e.g., copper & oil)


Morning Miners!

It is 5:37 AM. Have a well deserved cup of Raine's Red Label TGIF coffee. Looks like we're fixin' to close this week on a positive note. The Colonel is feeling better about both copper and oil as I reported to Kitco News this morning...

The Colonel's input to the Weekly Kitco Gold Survey

Here is my weekly input to the Kitco gold survey. I plan to expand on the theme below in my next week's Kitco commentary on copper & gold. It will be sequel to The Copper-Gold Conundrum of Sept.6:

Q: Where do you see gold’s price headed next week, up, down or unchanged?

A: Up, $1,700/oz here we come.

Q: Why?

A: I am cautiously optimistic about the prospects for both copper and gold going forward although they are probably range bound for the time being. Thankfully, the red metal and gold are in the same saddle again with positive 1-month and 3-month rolling correlations (note 1, below this paragraph). At the present gold/copper ratio (which is presently very stable, note 2), $3.50/lb copper is quite compatible with $1,750/oz gold placing both at the top of their near-term range. A scenario that some dire headline causes gold to spike much higher and copper to fall much lower seems less likely now. For example, if gold jumped to $1,800/oz and copper fell to $6,600/tonne ($2.99/lb, Oct. 3 intraday low) then the gold/copper ratio would be 600 lb/oz , a level not seen since the very worst days of the 2008-2009 financial crisis. Copper in a range of $3.00/lb to $3.50/lb and gold, $1,650/oz to $1,750/oz seems more likely unless you believe market Armageddon is just around the corner.

Note 1: For Friday morning COMEX prices: 1-month rolling correlation =+0.93; 3-month = +0.17

Note 2: The 1-month average gold/copper ratio is 497 lb/oz with a stability of 4.3% (defined as the 1-month ratio standard deviation divided by its 1-month mean)

Have a great weekend!


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 65.40, up from yesterday's 52.31 and above the 1-month moving average of 53.50. The new record low for 2010-2011 was set Oct. 4, 2011 at 22.88. The 1-month average is currently below the 100-level putting us solidly in bear country for the metals & miners.

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. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

200-day averages are used to update mining equity norms in the EMI on a monthly basis.

Gold Value Index (GVI)

The Eureka Miner’s Gold Value Index© (GVI) is above-par at 100.65, down from yesterday's 102.31 and below its 1-month average of 102.84. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011.Value Adjusted Gold Price© (VAGP) is $1,392.7/oz which is $284.8/oz below the current COMEX gold price.

The GVI initially trended down from 6/7/2010 when it had a value of 100; gold regained value reversing the trend, moved sideways for a time and and headed back up with vigor. A sustained presence around the 100-level may prove to be a recession warning for a second dip down in the economy.

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.

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 price is less than 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 and GVI indices. Today, the DCI has a value of 180.9 down from yesterday's 200.6. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now below that level.

Daily Oil Watch

Latest Nevada Fuel Prices

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 $86.52
ICE North Sea Brent crude $113.91
Spread (ICE- NYMEX) = $27.39 (last report, $25.65)

Here are the January contracts* with a narrower spread:

NYMEX light sweet crude $86.81
ICE North Sea Brent crude $110.24
Spread (ICE- NYMEX) = $23.43 (last report, $21.94)

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

Prices are off their crisis highs and we have $110+ Brent and $85+ NYMEX in January favoring high oil prices throughout the late fall and 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 $49.92(our new key level, 10/13 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The ORANGE light is turned on for Commodity Reflation with copper trading below $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 RED light is turned back on for Investor Confidence with investors very 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 $2.29 in early trading at $86.52 (November contract, most active); Gold is up $9.0 to $1677.5 (December contract, most active); Silver is up $0.593 to $32.260 (December contract, most active); Copper is up $0.1095 at $3.4030 (December contract, most active)

Western Molybdenum Oxide (General Moly website) is $14.00; European Molybdenum Oxide (Bloomberg) is $13.48; LME cash seller is $13.61, LME moly 3-month seller's contract is $13.61

Stock Market Morning Update

The DOW is up 120.30 points to 11,598.43; the S&P 500 is up 15.27 points at 1218.93

Miners are happy except for Timberline:

Barrick (ABX) $47.70 up 1.49%
Newmont (NEM) $64.88 up 1.77%
US Gold (UXG) $4.25 up 2.66%
General Moly (Eureka Moly, LLC) (GMO) $3.14 up 0.96%
Thompson Creek (TC) $7.30 up 2.24%
Freeport-McMoRan (FCX) $36.93 up 4.80% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $10.47 up 3.72%
Timberline Resources (TLR) $0.68 down 1.45%

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

ArcelorMittal (MT) $20.04 down 3.72% - global steel producer
POSCO (PKX) $82.59 up 1.23% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.79% at $1,393,378.44 (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 photo by Mariana Titus

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