The Colonel's Friday Thoughts on Gold & Copper

Curious Rock

My latest Kitco commentary:
Copper and Gold, "What a Long Strange Trip It's Been" (10/17/2011)

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

This morning's...
COMEX Gold price = $1,744.1/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 97.22
Value Adjusted Gold Price© (VAGP) = $1,499.1/oz
COMEX - VAGP = $245.0/oz; gold is trading at a premium to key commodities; the gold:copper ratio exceeds recession levels but continues to trend down (bullish move)


Morning Miners!

It is 5:37 AM. Have a second cup of Raine's delicious Red Label TGIF! Unless an asteroid strikes us Monday, it looks as if we're closing this month in pretty decent shape, pardner.



The Colonel's input to the Weekly Kitco Gold Survey

The ole Colonel is plenty happy about this week's market rally but didn't we see this movie about this time last year? Maybe a broader market correction in November then off to the races in December? This time around I'm going to sell Freeport-McMoRan before Chinese Lunar New Year!

Here is my weekly input for the Kitco gold survey.

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

A. Up. Although we are in a descendant value cycle for gold, its price can still rise in the present environment. It is not likely for gold to exceed $1,800/oz in the near-term.

Q. Why?

A. Gold value relative to key commodities copper, oil and silver is falling, down roughly 12% from its Oct.4 high. Gold has also re-established positive correlations with all three which is typically bullish for commodities and gold. In this environment gold price is likely to rise but not as quickly as the reference commodities. For example, if copper rises 9% to $4/lb due to declining LME and Shanghai inventories and improving demand, gold could reach its current psychological resistance level of $1,800/oz with only a 3% rise from this morning's price. This would require a copper-to-gold ratio of 450 lb/oz which is just below its 3-month average of 470 lb/oz. This ratio has been dramatically declining toward non-recession levels (i.e. <400 lb/oz) so 450 lb/oz in the near-term is very reasonable. Oil and silver ratios have already returned to non-recession levels with respect to gold thereby copper is the most important price to watch.

Have a good weekend - you deserve it.


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 99.61, up from yesterday's 85.63 and above the 1-month moving average of 49.97. 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 but we've broken out of the descending channel and the average continues its fourth day of upward trend.

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 97.22, up from yesterday's 95.96 and below its 1-month average of 101.96. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011.Value Adjusted Gold Price© (VAGP) is $1,499.1/oz which is $245.0/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. Recent moves down below the 100-level are bullish for key commodities.

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 155.0 down from yesterday's 155.5. A level above 200 is time for serious concern. We are now 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 ongoing crises 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

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

NYMEX light sweet crude $92.59
ICE North Sea Brent crude $109.88
Spread (ICE- NYMEX) = $17.29 (last report, $18.79)

Here are the February contracts* with a narrower spread:

NYMEX light sweet crude $92.49
ICE North Sea Brent crude $108.96
Spread (ICE- NYMEX) = $16.47 (last report, $17.14)

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

Prices are off their crisis highs and we have $100+ Brent and $90+ NYMEX in February favoring high oil prices throughout the late fall and winter.

Eureka Outlook Dashboard

4-WD is ON - The miners remain on rough roads; The VIX or "fear index" is slightly above 25; in early morning trading, bellwether Freeport-McMoRan (FCX) is below its 200-day moving average of $48.81(our new key level, 10/18 update); 10-year Treasurys are safely below 4% preserving a low-interest rate environment.

The YELLOW light is turned on for Commodity Reflation with copper trading around $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 30 (aka QE2) but will maintain low interest rates until mid-2013. Presently they are engaged in a bond program called "Operation Twist" to control long interest rates.

The YELLOW light is turned back on for Investor Confidence with investors less 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 down $1.37 in early trading at $92.596 (November contract, most active); Gold is down $3.6 to $1744.1 (December contract, most active); Silver is up $0.078 to $35.190 (December contract, most active); Copper is down $0.0300 at $3.6620 (December contract, most active)

Western Molybdenum Oxide (General Moly update) is $13.50/lb to $14.20/lb; European Molybdenum Oxide (Bloomberg) is $12.85/lb; LME cash seller is $13.15/lb, LME moly 3-month seller's contract is $13.15/lb

Stock Market Morning Update

The DOW is down 7.26 points to 12,201.29; the S&P 500 is down 2.58 points at 1,282.01

Miners are happy except Quadra is resting (after a terrific rally yesterday):

Barrick (ABX) $50.36 up 2.96%
Newmont (NEM) $66.99 up 1.41%
US Gold (UXG) $4.83 up 1.47%
General Moly (Eureka Moly, LLC) (GMO) $3.78 up 3.56%
Thompson Creek (TC) $7.50 up 2.04%
Freeport-McMoRan (FCX) $42.85 up 0.21% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $12.03 down 2.05%
Timberline Resources (TLR) $0.66 up 1.54%

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

ArcelorMittal (MT) $21.96 down 2.75% - global steel producer
POSCO (PKX) $89.24 up 1.66% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 1.43% at $1,534,460.01 (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