The Colonel's Thoughts on Gold, Copper & Silver; Kitco News "Mining Minutes"

"Copper Sun" - metal art by Mariana Titus

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 = $1,644.7/oz (December contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 100.45
Value Adjusted Gold Price© (VAGP) = $1,368.0/oz
COMEX - VAGP = $276.7/oz; gold is trading at a premium; the gold:copper ratio exceeds recession levels


Morning Miners!

It is 5:25 AM. Have a well earned cup of Raine's Red Label TGIF. The European moon tide is set to lift the metals & miners a little higher today...



Kitco News adds "Mining Minutes" Feature

Kitco News has added a new feature called "Mining Minutes" with the latest on activities in the mining industry including news briefs on production and investment developments. Our hats off to Kitco News Content Coordinator Alex Létourneau and contributors to these informative mining updates.

A link to "Mining Minutes" can be found in the Miner's Corner in the right column of this blog page. Check it out, pardner.

The Colonel's input to the Weekly Kitco Gold Survey

Here is my weekly input to the Kitco gold survey.

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

Up, positive bias to prices in a range.

2. Why?

As long as gold prices are under the influence of the European moon tide, they will remain range bound. Gold now has strong positive price sensitivity with some key commodities (especially copper & silver, see note 1) suggesting that as European optimism for debt crisis solution waxes and wanes; gold and those commodities will rise and fall together. Going into this weekend of euro-meetings, there appears to be greater hope than just yesterday. Gold will remain in a $1,600/oz to $1,700/oz range with a positive bias higher for next week tracking with copper prices constrained to $3.0/lb to $3.5/lb. The good news is that stability is returning to gold-referenced commodity ratios, a necessary but not sufficient condition for a bullish close to 2011 (see note 2).

Background Notes:

Note 1: The 3-month COMEX copper-gold price sensitivity (beta) is 0.994 suggesting that a 1% rise in gold price will result in a 1% rise in the red metal. Since beta is the product of volatility and correlation, it is interesting to note that copper is now twice as volatile as gold (2.17) with a correlation of one-half (0.458).

The 3-month NYMEX oil-gold sensitivity is nearly zero but positive nonetheless (beta = 0.024).

The 3-month COMEX silver-gold sensitivity is a strong 1.851 restoring their more traditional relation (i.e. prices changes in silver greater than gold)

Note 2: Prices that move in tandem disturb their price ratio the least so the gold-to-copper ratio (Au:Cu), although elevated to recession levels, is showing remarkable short-term stability. The 1-month ratio stability is 2.79% this morning. I define "very stable" as measures below 3% (stability is the ratio standard deviation divided by its mean over that time period). The 3-month ratio stability remains "divergent" at 9.88% but is lower than the 12.55% high of early October when the markets were in frightening disarray. If the 1-month stability remains low, it will slowly improve the 3-month number - a bullish trend.

The Au:Cu ratio is presently a tall 513 lbs/oz. During the worst days of the 2008-2009 financial crises, the ratio was in a range of 400-620 lbs/oz - a normal market number is 350 lb/oz. It appears we are stabilizing near the present level suggesting a pop to 600+ territory is less likely.

Although the ole Colonel didn't include this in the survey, he expects to see silver prices in a range of $30.48/oz to $32.38/oz in the near-term.

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 45.69, up from yesterday's 39.96 and above the 1-month moving average of 43.03. 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 100.45, down from yesterday's 101.57 and below its 1-month average of 103.25. The new record high for 2010-2011 is 109.97 set on Oct. 4, 2011.Value Adjusted Gold Price© (VAGP) is $1,368.0/oz which is $276.7/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 203.4 down from yesterday's 222.3. Our benchmark is 100, a value of the DCI at a level above 200 is time for serious concern. We are now 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 $88.58
ICE North Sea Brent crude $111.49
Spread (ICE- NYMEX) = $22.91 (last report, $22.93)

Here are the February contracts* with a narrower spread:

NYMEX light sweet crude $88.85
ICE North Sea Brent crude $109.34
Spread (ICE- NYMEX) = $20.49 (last report, $20.70)

* 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 $85+ NYMEX in February favoring high oil prices throughout the late fall and winter.

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 $49.56(our new key level, 10/18 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 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 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 $2.51 in early trading at $88.58 (November contract, most active); Gold is up $31.8 to $1644.7 (December contract, most active); Silver is up $1.084 to $31.365 (December contract, most active); Copper is up $0.1705 at $3.2280 (December contract, most active)

Western Molybdenum Oxide (General Moly update) is $13.50/lb to $14.20/lb; European Molybdenum Oxide (General Moly update) is $12.80/lb to $13.10/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 up 206.51 points to 11,748.29; the S&P 500 is up 22.24 points at 1237.63

Miners are happy:

Barrick (ABX) $44.96 up 1.42%
Newmont (NEM) $62.55 up 1.48%
US Gold (UXG) $3.97 up 3.12%
General Moly (Eureka Moly, LLC) (GMO) $3.11 up 2.30%
Thompson Creek (TC) $6.74 up 3.06%
Freeport-McMoRan (FCX) $35.71 up 2.64% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $10.46 up 4.67%
Timberline Resources (TLR) $0.64 up 4.92%

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

ArcelorMittal (MT) $18.69 up 2.69% - global steel producer
POSCO (PKX) $78.70 up 0.41% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is up 2.21% at $1,351,042.78 (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