"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.

Friday, May 11, 2012

The Colonel's Friday Thoughts on Gold, Silver & Copper; "London Whale" Flops

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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 Kitco commentary: Are Gold and Silver Parting Ways? (5/07/2012)

This morning's...
COMEX Gold price = $1,582.1/oz (June contract most active)
Eureka Miner’s Gold Value Index© (GVI) = 91.35 (gold value gaps up, 5/4; gold value weakly trending higher)
Value Adjusted Gold Price© (VAGP) = $1,447.1/oz
COMEX - VAGP = $135.0/oz; gold is trading at a premium to key commodities; the gold-to-copper ratio remains below its 3-month average (weakly bullish condition with average moving sideways, Cu overall neutral)



Morning Miners!

It is 6:08 AM. Have a welcome cup of Raine's Red label TGIF brewed with that delicious piñon pine flavor. The ole Colonel will be on the road next week but up and at'em for the Friday gold, silver and copper report. Have a great weekend.

The Colonel's Friday Thoughts on Gold, Silver & Copper; "London Whale" Flops

Old timers like the Colonel remember 1960s movie thrillers that featured clever bank robbers making off with ungodly sums of money, say $100,000. Whoa Nellie!

Times have changed. Today's new actor is a trader nicknamed the "London Whale" who is alleged to have made a series of bad credit derivative trades for J.P. Morgan Chase - the bank is expected to lose as much as two billion dollars. That's $2,000,000,000, a big-big Whoa Nellie!

Needless to say in our present downbeat global environment, headline shock has depressed precious and base metal prices this morning.

Here is my input to the Weekly Kitco Gold Survey:

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

A. Up, $1,610 per ounce target.

Q. Why?

A. It is likely that COMEX gold will test its April intraday low ($1,613.0/oz) which has flipped from support to resistance after the recent downturn in prices. If, as Dennis Gartman has recently suggested, there is margin-related selling in gold and silver then next week could witness a modest relief rally for both.

Yesterday’s J.P. Morgan headline shock aside, precious and base metal prices continue to be under pressure but relatively stable as central banks attempt to manage a global slowdown and Europe shows signs of deepening financial crisis. Accommodative monetary is generally bullish for gold but the European debt crisis exerts a bearish influence (e.g., weak euro, strong U.S. dollar). Given lower demand expectations (e.g., recent disappointing China industrial production data), base metals like copper are range-bound supported by growing supply tightness.

Lacking any major geopolitical shocks, price crashes in either precious or base metals are unlikely. For example, 3-month copper price volatility remains less than (0.88X) gold and gold ratios are still very stable (e.g., gold-to-copper & gold-to-silver). However, there has been bearish expansion of the gold-to-silver ratio since April 23.

For $1,610 per ounce gold we can expect to see silver in a range of $28.8-$31.0 per ounce; and copper, $3.50-$3.77 per pound.


Background Notes:

1. The relief rally will stall below the April low. My target is also biased below the geometric mean ($1,627.7 per ounce) of today’s morning low ($1,572.0 per ounce) and April’s high ($1,685.4 per ounce).

2. Given the target gold price, the copper and silver price ranges are derived from the 1-month gold ratio mean (GCR & GSR) and respective ratio stability (CRS©)

3. My Gold Value Index© (GVI) equals 91.35 this morning down 16.9% from the Oct. 4 high of 109.97. The GVI is weakly trending higher.

4. The gold-to-copper ratio today is 435.96 pounds per ounce and below its 3-month moving average of 442.75 pounds per ounce. Remaining below this average and trending towards the 400 pounds per ounce level is weakly bullish for copper as the average moves sideways for now (1-month rolling correlation is +0.41; 3-month is +0.53). 3-month relative volatility is 0.88X gold and price sensitivity (beta) is +0.47.

5. The gold-to-silver ratio is trending above its historical norm at 55.3 (bearish); 3-month rolling correlation is +0.91, relative volatility is 1.88X gold and price sensitivity (beta) is 1.70

6. The SPDR Gold Trust (GLD) is bouncing off its 400-day average and the PowerShares DB US Dollar Index Bullish Fund (UUP) has broken above its 100-day average. Technically, bearish gold; bullish U.S. dollar

Daily Market Roundup


Mining Report

This morning's mining stocks...

Barrick (ABX) $37.42 down 0.93%
Newmont (NEM) $45.73 down 1.02%
McEwen Mining (MUX) $2.97 down 2.30% (formerly US Gold, UXG)
General Moly (Eureka Moly, LLC) (GMO) $2.99 down 0.99%
Thompson Creek (TC) $4.34 down 0.46%
Freeport-McMoRan (FCX) $34.97 down 0.96% (a bellwether mining stock spanning copper, gold & molybdenum)
Timberline Resources (TLR) $0.38 down 2.56%

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

ArcelorMittal (MT) $16.06 down 1.89% - global steel producer
POSCO (PKX) $83.96 up 0.31% - 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 below-par at 69.76, down from last report's 74.05 and below the 1-month moving average of 108.5. The 1-month average is falling but still 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. The 2012 YTD low is 59.74 recorded 05/09/2012. An EMI of 100 is the boundary between hot and cold markets for the metals & miners.

Gold & Silver Report

This morning's...

COMEX gold is down $13.4/oz at $1,582.1/oz (June contract, most active)

COMEX silver is down $0.568/oz at $28.610/oz (July contract, most active)

The gold-to-silver ratio (Au:Ag) is 55.299 oz/oz

Silver 1-month CRS© is 1.91% (bullish stability level); very stable ratio; 1-month & 3-month < 3% (Ag overall indicators bearish)

The Eureka Miner’s Gold Value Index© (GVI) is below-par at 91.35, up from last report's 90.50 and above its 1-month average of 90.37. Gold value gaped up Friday, 5/4/2012, and is weakly trending higher; a bearish indication for key commodities. The record high for 2010-2012 is 109.97 set on Oct. 4, 2011.

The Value Adjusted Gold Price© (VAGP) is $1,447.1/oz which is $135.0/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.

Copper & Molybdenum Report

This morning's...

COMEX copper is down $0.0615/lb at $3.6290/lb (July contract, most active)

The gold-to-copper ratio is 435.96 lb/oz; ratios in excess of 400 lb/oz are indicative of a bearish price domain; the ratio is below its 3-month moving average of 442.75 (Cu weakly bullish condition in a bearishPrice Domain B)

Copper 1-month CRS© is 1.91% (bullish stability level); very stable ratio; 1-month & 3-month < 3% (overall indicators neutral)

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

Metals Week Average:
US$13.95
As of May 14, 2012
(updated weekly)

Ryan's Notes Average:
US$14.05
As of May 8, 2012
(updated twice weekly)

European Molybdenum Oxide (Bloomberg average price, updated Wednesday & Friday):
US$13.98/lb

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

US$14.06/lb (US$31,000/metric ton)

Daily Oil Watch

Latest Nevada Gas Prices (click this link)

Understanding the Price of Oil (click this link for a quick overview on crude oil prices)

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 $110/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 $96.03
ICE North Sea Brent crude $111.90
Spread (ICE- NYMEX) = $15.87 (last report, $15.84)

Here are the August contracts* with a narrower spread:

NYMEX light sweet crude $96.70
ICE North Sea Brent crude $111.12
Spread (ICE- NYMEX) = $14.42 (last report, $14.42)

* NYMEX futures contracts have rolled forward, we now show June and August.

NYMEX WTI 1-month CRS© is 2.14% (bullish stability level); very stable ratio; 1-month & 3-month < 3% (overall indicators bearish)

Prices remain high for 2012 but have pulled back dramatically, we have $110+ Brent and $95+ NYMEX in August still favoring high oil prices this summer. A front-month spread between Brent and WTI >$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 is 77.4 down from last report's 78.5. A level above 200 is time for serious concern - we are now well below that level. The highest level recorded since inception was 271.0 Aug. 9, 2011; the lowest level is 65.1 on Mar. 13, 2012

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 28.38 points to 12,826.66; the S&P 500 is down 2.66 points at 1,355.33

The Eureka Miner's Grubstake Portfolio is down 0.80% at $1,259,888.7 (what's this?).

Cheers,

Colonel Possum

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

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