"The history of Eureka lies in its future." - Lambert Molinelli, 1878

DISCLOSURE

The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO), McEwen Ming (MUX) and Newmont Mining (NEM); together with benchmark miner Freeport-McMoRan (FCX). Please do your own research, markets can turn on you faster than a feral cat.

Monday, February 13, 2012

The 2012 Copper-Gold Conundrum

The Diamond Range was here long before the Rocky or High Sierra Mountains...350,000,000 years old
Diamond Valley, Eureka, Nevada


Therein lies the rub. For in that sleep of death we know not what dreams may come... Hamlet's Soliloquy, Shakespeare

NEW FORMAT for 2012

Morning Commentary
Daily Market Roundup
- Gold & Silver Report
- Copper & Molybdenum Report
- Oil Watch
- Debt Crisis Watch
- Stock Market Morning Update
- Eureka Miner's Million Dollar Grubstake Portfolio


My Latest International Business Times commentary: Gold and Silver Move Uptown for 2012 (02/06/2011)

My latest Kitco commentary: Copper and Gold Plan Their 2012 World Tour (01/30/2012)

This morning's...
COMEX Gold price = $1,723.9/oz (April contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 91.83 (gold value stalled, possible reversal to the downside - see below)
Value Adjusted Gold Price© (VAGP) = $1,568.6/oz
COMEX - VAGP = $155.3/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio continues to exceed recession levels


Morning Miners!

It is 6:55 AM. Have a cup of Monday Ether, it's good for getting more than cold diesel's running. Sunday, Greece's parliament passed sweeping austerity measures, a key condition to receive another bailout. Rioting in the streets has blunted some of the market's enthusiasm, if Greece misses default next month what about the next time debt payments come due? Nonetheless, 17 of 19 global markets are in the green on the news and our favorite metals are up to start the week in a "risk on" mood. Oh boy, the ole Colonel needs another cup of ether.

The 2012 Copper-Gold Conundrum

It's hard to say that the red metal hasn't had good year so far. COMEX copper this morning is trading up $0.0125/lb at $3.8745/lb which is a healthy 12.7% from where we left it at the end of 2011. Gold has been doing well too riding shotgun with the metals to rise 10% over the same period, presently trading at $1,723.9/oz.

When copper price rises faster than gold, the gold-to-copper (Au:Cu) price ratio compresses which is typically a bullish sign for base metals. As the stagecoach pulled into the station last year, 456 pounds of copper bought an ounce of gold.; this morning it only takes 445 pounds. But therein lies the rub - during more normal times it should only take 300 to 400 pounds to fetch an ounce of glitter, during copper's best month last year the Au:Cu dropped to a very bullish 293 pounds-per-ounce February. What's going on?

This report considers an Au:Cu ratio above 400 pounds-per-ounce to be a recession level historically; during the Great Recession it dipped to a frightening 621 pounds-per-ounce. Given this backdrop, today's copper is most likely reflecting the expected recessionary environment in Europe, slowing demand in China and improving demand in the United States - not a great situation but certainly not Armageddon either. On the supply side, tightness is expected to persist with a net deficit for 2012.

There are several good reports on this situation today. Kitco news reports Morgan Stanley regards copper as "the preferred base metal" noting the challenges facing aluminum:

Market Nuggets:Morgan Stanley: Aluminum Burdened By Supply Overhang (Allen Sykora, Kitco Market Nuggets, 02/13/2012)

The Morgan Stanley analyst explains, "Until the global inventory pipeline is replenished and a reliable supply environment ensues, copper prices should stay well above marginal cost...We do not expect sustained relief from this constrained supply before 2014.”

Reuters adds some detail on the current demand side in this piece;

METALS-Copper up on Greek progress but demand woes weigh (Maytaal Angel, Reuters, Feb 13, 2012 10:46am GMT)

Reuters quotes Citigroup analyst David Wilson, "There's still a sense that the copper rally has been overdone. China hasn't been buying, total global exchange stocks have actually risen since beginning of December and Chinese premiums have been softening over the last month and a half."

So there you have it, pardner - a mixed picture for the red metal. The ole Colonel remains overall bullish on copper and is holding on to his Freeport-McMoRan (FCX) stock with both hands. Even if there are some ups-and-downs ahead, the copper giant pays a 2.23% dividend at it present share price and that beats a bank CD any day.

Please do your own research, tomorrow's tea leaves in the copper cup may tell a different tale in this New Year of the Dragon.

Daily Market Roundup


Mining Report

This morning's mining stocks...

Barrick (ABX) $48.05 down 0.21%
Newmont (NEM) $59.32 down 0.50%
McEwen Mining (MUX) 5.11 up 0.39% (formerly US Gold, UXG)
General Moly (Eureka Moly, LLC) (GMO) $3.68 up 1.10%
Thompson Creek (TC) $8.97 up 0.79%
Freeport-McMoRan (FCX) $45.03 up 0.20% (a bellwether mining stock spanning copper, gold & molybdenum)
Quadra FNX (TSE:QUX) $14.98 down 0.53%
Timberline Resources (TLR) $0.50 unchanged

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

ArcelorMittal (MT) $22.48 up 1.26% - global steel producer
POSCO (PKX) $92.30 up 1.45% - South Korean integrated steel producer

The Eureka Miner's Index© (EMI) was re-calibrated 2/8 to reflect current 200-day moving averages for benchmark miners.

The EMI is above-par at 256.93, up down last report's 242.19 and above the 1-month moving average of 194.99. The 1-month average is currently above the key 100-level.

The EMI gives us the market temperature for the factors that have the greatest impact on mining in Eureka County. The record 2010-2012 high for the EMI is 816.78 set 01/04/2011; the low was set 10/4/2011 at 22.88. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

Here is the Eureka Miner's Index© (EMI) through Friday's close (a larger more readable plot is near the bottom of the blog page):


Today's EMI remains solidly above the 100-level. The 1-month moving average is above this key level also, a necessary condition for returning our miners to bull pasture. Any change in these trends will be monitored carefully, so far so good.

Gold & Silver Report

This morning's...

COMEX gold is up $1.2/oz at $1,723.9/oz (April contract, most active)

COMEX silver is up $0.031/oz at $33.635/oz (March contract, most active)

The gold-to-silver ratio (Au:Ag) is 51.253 oz/oz

Silver 1-month CRS© is 2.50% (bullish level); stalled convergence (Ag neutral)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 91.83, down from last report's 92.64 and below its 1-month average of 92.39. The gold value has stalled, but it may return to a decling trend. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,568.6/oz which is $155.3/oz below the current COMEX gold price.

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.

The Eureka Miner’s Gold Value Index© (GVI) stalled last week with an indeterminate trend. A strong move down this morning may indicate a reversal to declining trend going forward. Here is plot of the GVI at Friday's close (also near the bottom of the blog page):


To keep the metals & miners firmly back on their feet, we need gold to give up more relative value to copper, oil and silver. Remember, the GVI and EMI typically (but not always) have an inverse relation; as the GVI falls, the EMI rises. Today's GVI may resume its downward trend (bullish miners). Presently, the GVI at 91.83 is above an average of 92.39 and down 16.5% from its 2010-2011 high of 109.97.

Copper & Molybdenum Report

This morning's...

COMEX copper is up $0.0125/lb at $3.8745/lb (March contract, most active)

The gold-to-copper ratio is 444.93 lb/oz; ratios in excess of 400 lb/oz are considered "recession levels" (Cu bearish)

Copper 1-month CRS© is 1.38% (bullish level); weak convergence (Cu neutral)

The latest molybdenum oxide spot and futures prices (courtesy of Thompson Creek Metals):

Metals Week Average:
US$$14.50
As of February 13, 2012
(updated weekly)

Ryan's Notes Average:
US$14.60
As of February 10, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):
US$14.65/lb

London metal Exchange (LME) molybdenum 3-month seller's contract:

US$14.74/lb (US$32,500/metric ton)

Daily Oil Watch

Latest Nevada Fuel Prices (click this link)

A faithful friend of this report in Mumbai sent this insightful article on China, Iran and oil:

China buys up Saudi, Russian oil to squeeze Iran (Published on Wed, Feb 08, 2012, Reuters)

On February 1st, 2011, we identified North Sea Brent crude oil as a good barometer for the crises in the Middle East and North Africa (MENA). The next conflict could be in the Persian Gulf. Brent remains above $100/bbl maintaining a spread above the North American benchmark, Western Texas Intermediate or "Texas light sweet crude", traded on the NYMEX.

Here are the key front-month contracts this morning:

NYMEX light sweet crude $100.33
ICE North Sea Brent crude $117.78
Spread (ICE- NYMEX) = $17.45 (last report, $19.20)

Here are the May contracts* with a narrower spread:

NYMEX light sweet crude $101.23
ICE North Sea Brent crude $117.31
Spread (ICE- NYMEX) = $16.08 (last report, $17.88)

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

NYMEX WTI 1-month CRS© is 3.10% (bullish level); weak convergence (Oil bullish)

Prices are off their crisis highs but we have $115+ Brent and $95+ NYMEX in May favoring high oil prices this spring. A front-month spread >$20/bbl is a trouble sign.

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 87.3 down from last report's 93.9. A level above 200 is time for serious concern. We are now well below that level.

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 and continuing into 2012.

Stock Market Morning Update

The DOW is up 50.22 to 12,851.45; the S&P 500 is up 6.84 points at 1,349.48

The Eureka Miner's Grubstake Portfolio is up 0.36% at $1,570,571.82 (what's this?).

Cheers,

Colonel Possum

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

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