Bad Week for Gold & GMO, but...; The Colonel's Metal Prices for Next Week

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UPDATE (02/19/2013):
 
General Moly Announces Continued Progress on Mt. Hope Project Financing and Development

My latest Kitco commentary: Oil, Copper & Gold – Beware the Snake? (02/11/2013)

Friday's morning prices...

Below are the prices used for this morning's analysis. Since then Comex gold plumbed $1,596.7 per ounce (10:35AM ET) but has since recovered to $1,607.2 

COMEX Gold price = $1,610.5/oz (April contract most active)
COMEX Silver = $29.965/oz (March)
COMEX Copper = $3.7360/lb (March)
NYMEX WTI crude = $95.54/bbl (March)
ICE Brent crude = $116.52/bbl (March)
Eureka Miner’s Gold Value Index© (GVI) = 91.08 (gold value is still elevated but falling rapidly with respect to key commodities oil & copper)
Value Adjusted Gold Price© (VAGP) = $1,477.5/oz
COMEX - VAGP = $133.0/oz; gold is trading at a falling premium to key commodities.

Morning Miners!

A  very tough week for gold prices and General Moly (GMO) stock. There are reasons for both declines; the fall in the yellow metal is troubling but GMO's dip may represent a buying opportunity. This morning, Comex gold ominously fell below the key-$1,600 per ounce before recovering some for reasons discussed in my weekly gold report (see Kitco Gold Survey below).

When the world's second largest economy takes a one week vacation there is bound to be some market turmoil. Chinese Lunar New Year began last Sunday and Chinese commodity traders won't return to their desks until Monday (markets in the U.S. will be closed Monday). On a thinly traded week, General Moly stock has been under considerable of pressure; last Friday it closed at $3.45 above its 300-day moving average ($3.31), this morning it fell below and is presently trading at $3.27. This is in stark contrast to early January when the stock had enjoyed $4+ performance.

Lately, the 300-day average is important to watch for steel producers as well as moly miners. This average covers a little more than 1-year's data (there are 252 trading days in a year for U.S. markets). If you think things are getting better for producers and miners on a recovering global economy, it is reasonable to expect their equity prices to be above the average. Here is a sample of where they are this morning:

POSCO (PKX) $82.63 (300 dma) $83.336 (this morning) up 0.9%
ArcelorMittal (MT) $16.94 (300 dma) $16.22 (this morning) down 4.3%
Thompson Creek (TC) $4.69 (300 dma) $3.92 (this morning) down 16.4%
General Moly (GMO) $3.31 (300 dma) $3.27 (this morning) down 1.2%

Not particularly stellar performance considering broader markets have been making highs on nearly a daily basis at levels not seen since 2007. For comparison, the S&P 500 is nearly 10% above its 300-day average and up 6.6% for 2013. To feel a little better about steel producers and moly miners, consider that Barrick Gold (ABX) is more than 20% below the same average with falling gold prices and rising costs.

Of course, the overhang for the steels is a Europe in contraction, China which is growing but at a slower pace than more than a decade and the U.S., while showing new signs of life, still faces high unemployment and some daunting fiscal challenges.

Yesterday morning, Feb. 14, was a good example of the volatility steel producers face daily. South Korean steel producer POSCO broke above its 300-day with a nice 1% move and the South Korean stock exchange,or KOSPI, has been heading north again even with nukes going off in their neighbor's yard. By contrast, global steel producer ArcelorMittal, which presumably has much more European exposure than POSCO, was down 1.7% and below its 300-day. Japan had announced earlier that they were still in contraction (GDP=-0.4%, 4Q2012) but that's much better than 3Q at -3.2%. As a result the Nikkei got another bump up on its upward trend. On the same day, Germany announced its worse contraction since 2009 adding to Europe's woes and dismal outlook for steel producers there.

An "Asia on the mend with loose monetary policies (e.g. Japan)" should keep POSCO flying on a relative basis to MT given large exposure to China and Japan. I use a ratio of POSCO's share price to General Moly's (i.e. PKX/GMO) as a rough gauge of performance between the two. This week the ratio is way out of whack at 25 suggesting something besides macro-economics is at play with General Moly. Recent history indicates the ratio should be around 20-21 which would return GMO to around the $4-mark.

There haven't been any adverse General Moly press releases and all indications are that the Hanlong loan is on track to support Mt. Hope mine construction this spring. It is quite possible, however, that there has been some selling by one or more large holders of GMO stock in a thin Lunar Holiday market. The ole Colonel is inclined to believe the latter and picked up a few more shares of the General which should climb above $4 again as things get rolling later this year.

Please do your own research - I've been wrong before, pardner.

On a more sobering note, molybdenum spot prices are still below $12 per pound level. Here are the latest numbers compliments of Thompson Creek Metals (TC):

Metals Week Weekly Average:
US$11.365
As of February 8, 2013
(updated weekly)

Ryan's Notes Average:
US$11.35
As of February 12, 2013
(updated twice weekly)

The London Metal Exchange (LME) futures contracts also remains below $12, and the 3-month contact is now in backwardation relative to spot prices - rarely a positive sign for this market.

3-month seller's contract $24,800 per metric ton ($11.25 per pound)

15-month seller's contract $25,520 per metric ton ($11.58 per pound)

A Reader's Pros and Cons for Buying General Moly Now

A faithful reader of this report and longtime General Moly investor sent me his list of pros and cons for buying General Moly shares at last week's depressed prices. He tells the Eureka Miner that he is net positive when he considers the following list:

Pros for buying GMO

Share price is approximately the same price as before permitting
Price is the same price as before 100MM POSCO contribution
Close to final terms sheet from Hanlong
Price went down during Chinese New Year holiday break
IR is going to agressively promote GMO near the construction phase

Cons

Price of moly going lower
Potential for front running
No earnings for 2 years
Commodity prices in doldrums
Could be head fake on economy rebound
Europe economy very weak

Again, please create your own list of trade-offs - research is key, we are in some very treacherous markets.

Where do gold, silver and copper prices go next week? Checkout my today's input to the weekly Kitco Gold Survey below.

Enjoy another cup of Raine's delicious Red Label TGIF and have a great weekend.

The Colonel's Gold, Silver & Copper Prices for Next Week

02/15/2013 (10:49AM CT)

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

A. Down, $1,600 per ounce target.

Q. Why?

A. Gold has had a terrible week ending with a sharp Friday morning sell-off plumbing a Comex intraday low of $1,596.70. There have been two primary drivers - a World Gold Council report that 2012 gold demand fell 4% compared to a year ago and U.S. SEC fourth-quarter filings that show a number of high-profile fund managers such as George Soros have reduced their holdings in gold exchange-traded products.

The yellow metal has lost significantly more value relative to oil and copper as well as the broader markets this week.

Technically, negative 1-month and 3-month rolling correlations between gold and global commodities oil and copper are all negative. This is a relatively rare event occurring less than 5% of the time since mid-2006 (Ref 3). With broader markets continuing their upswing, the likely explanation is that gold is rapidly losing the premium it has accumulated over the last 6-1/2 years as gold-to-oil and gold-to-copper ratios move closer to historical norms.

Although this trend may take gold price much lower in the coming months, the return of Chinese traders next week should give gold some support at the key-$1,600 level.

For $1,600 per ounce gold we can expect to see silver in a range of $29.4-$30.3 per ounce; and copper in a range of $3.71-$3.79 per pound. Silver and copper are expected to have a negative bias below their range means ($29.876 & $3.7498 respectively).

As measured by the Eureka Miner’s Gold Value Index (GVI, Ref 1), the value of gold relative to global commodities copper and oil and companion metal silver is 91.08, a multi-month low below the key-100 level and 1-month moving average of 92.98 (bearish gold trend). The 2012 high was 103.73 on Nov. 13.

The ratio of gold-to-the S&P 500 (AUSP) is now 16.8% below its 2012 high (1.2710, Nov.15) at 1.0571. The latest price action indicates gold has lost considerable value relative to the broader market.

Background Notes:

1. My gold target price of $1,600 per ounce is a key psychological level.
2. Given the target gold price, the silver price ranges are derived from the 1-month gold ratio mean (GSR) and its respective ratio stability (CRS©). A different technique was used to predict the price range for copper given the high negative correlation with gold.
3. My Gold Value Index© (GVI) equals 91.08 or 12.2% below the 2012 high of 103.73. Today gold value is below its 1-month moving average of 92.98; a value of 100 represents a historically high-value of gold relative to key commodities oil, copper and silver.
4. The gold-to-copper ratio today is 431.08 pounds per ounce and below its 3-month moving average of 461.72 and 6-1/2 year trend of 487.74. Falling below the long-term trend line is a bullish indication for the red metal (Ref 2).  The 1-month gold-to-copper ratio stability is a low 1.92%. The 1-month rolling correlation is -0.31; 3-month is -0.52. 3-month relative volatility is 1.24X gold and price sensitivity (beta) is -0.65
5. The gold-to-silver ratio (GSR) is above its historical norm at 53.746; the 3-month rolling correlation is +0.89, relative volatility is 2.58X gold and price sensitivity (beta) is +2.09. The GSR is above its 3-month average of 53.04; the 1-month gold-to-silver ratio stability is an extremely low 0.72%.

Ref 1: Gold Versus Copper, Oil and Silver: The Value Trend Is Your Friend (Kitco News, 7/23/2012)

Ref 2: Oil, Copper & Gold – All in the Family (Kitco News, 01/22/2012) 

Ref 3: Oil, Copper & Gold – Beware the Snake? (Kitco News, 02/11/2012)

Cheers,

Colonel Possum

Headline photograph by Mariana Titus

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