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


The author/editor of the Eureka Miner owns common shares of local mining stocks, General Moly (GMO) 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, February 22, 2013

Gold & Commodity Nose Dive, GMO Resilient; The Colonel's Metal Prices for Next Week

Latest Nevada Gas Prices (click this link)

My latest Kitco commentary: Oil, Copper & Gold – Don’t Worry (02/25/2013)

Friday's morning prices...

Below are the prices used for this morning's analysis:

COMEX Gold price = $1,574.3/oz (April contract most active)

COMEX Silver = $28.515/oz (March)
COMEX Copper = $3.5420/lb (March)
NYMEX WTI crude = $92.78/bbl (March)
ICE Brent crude = $114.05/bbl (March)
Eureka Miner’s Gold Value Index© (GVI) = 92.98 (gold value is still elevated but falling with respect to key commodities oil & copper)
Value Adjusted Gold Price© (VAGP) = $1,414.7/oz
COMEX - VAGP = $1159.6.0/oz; gold is trading at a falling premium to key commodities.

Morning Miners!

This week started out just fine with Chinese traders providing needed support to last week's falling gold prices. Monday was a day off for U.S. markets so little damage was done on the home front. The broader markets were up Tuesday and  the S&P 500 made a new high for the year touching 1,530.94 during the day. General Moly (GMO) released a very positive press release the same day which confirms that the Hanlong loan is on track to support Mt. Hope mine construction this year:

General Moly Announces Continued Progress on Mt. Hope Project Financing and Development

GMO share price got a nice boost and closed at $3.36 for the day.

So far, so good.

On the dark side of that day, Comex gold was swept under the rug plummeting to a $1,558.0 per ounce low starting a broad-based liquidation in  precious metals. Wednesday, gold put in its low for the week at $1,554.1 per ounce - quite a fall from grace considering the high for February was $1,686.1, a jaw-dropping $132 difference.

Like dominoes, the decline in gold prices were followed by sharp reversals in base metals and a sell-off in the broader markets. Comex copper prices are still in decline this morning currently trading at $3.5420 per pound compared to their high earlier this month of $3.7924. Silver has dropped below $29 per ounce trading at $28.15 compared to its February watermark of $32.12. Ouch.

The S&P 500 is getting some relief today at 1,507.23 but dropped all the way down to 1,497.29 yesterday from its Tuesday feelgood 1,530.94. Ouch-ouch.

General Moly made its low earlier this morning at $3.142 but has recovered nicely to $3.22 , 14 cents below Tuesday's bump up.

What's going on? As I discuss in my weekly gold report (see Kitco Gold Survey below), one major clunker was a fear that the Federal Reserve may end quantitative easing sooner than expected as suggested by some hawkish debate coming from its ranks. This has moderated some with clarifications from the Fed today but the damage has been done - easy money won't be forever.

Another factor has been worsening conditions again in Europe as it enters a second year of contracted growth and political volatility. The euro dropped to a 6-week low boosting the U.S. dollar index to a 3-month high. Dollar-denominated commodities suffered precipitating significant liquidations in risk assets including metals.

There are some technical indications that the worst may be over for now (see below) but the coming weeks could bring further pressure on the metals & miners.

Last week we used the 300-day share price average as a yardstick for gauging the relative performance of steel producers and moly miners.  Here is an update of where they are this morning, the percent change in parentheses is last week's number:

POSCO (PKX) $82.58 (300 dma) $82.68 (this morning) up 0.1% (+0.9%)
ArcelorMittal (MT) $16.9 (300 dma) $15.25 (this morning) down 9.8% (-4.3%)
Thompson Creek (TC) $4.69 (300 dma) $3.92 (this morning) down 23.9% (-16.4%)
General Moly (GMO) $3.31 (300 dma) $3.27 (this morning) down 2.7% (-1.2%)

All are down more than last week but South Korean steel producer POSCO and General Moly have fared far better than global steel producer ArcelorMittal and moly benchmark producer Thompson Creek. For comparison, the S&P 500 is 9% above its 300-day average (10% last Friday). Barrick Gold (ABX) is more than 22% (20% last Friday)  below the same average with falling gold prices and rising costs.

Molybdenum Prices

This week, I had an informative moly price discussion with General Moly's Director of Investor Relations Scott Kozak. Spot prices are still below $12 per pound level. Here are the latest numbers:

Metals Week Weekly Average:

As of February 18, 2013
(updated weekly)

Ryan's Notes Average:

As of February 19, 2013
(updated twice weekly)

The London Metal Exchange (LME) futures contracts also remains below $12, but the 3-month contact is now aligned with spot prices and the longer term contract got a small move up.

3-month seller's contract $25,000 per metric ton ($11.33 per pound)

15-month seller's contract $25,710 per metric ton ($11.66 per pound)

General Moly maintains subscriptions to Metals Week and Ryan’s Notes which report the above weekly worldwide averages. Scott maintains they are a better proxy on pricing than the LME. He and I agreed that the LME is a thinly traded futures market and I suspect, more sensitive to moly prices in Europe.

I asked Scott about the status of China with regards to imports and exports of molybdenum. He replied that China was a marginal net exporter of moly in 2012, well under 10 million pounds in a roughly 530 million pound primary use market. He reminded me that not that many years ago, China was a significant net exporter on the order of 65 million pounds just prior to the Great Recession. China transitioned to being a sizable (approximately 35 million pound) net importer when moly prices dipped below $10 per pound. As prices recovered, this trend reversed and now China maintains a small and declining export of the metal. Scott expects China to again become an importer of moly as their demand for steel increases and they move up the value chain producing higher quality moly-based steels. In time, China could potentially become a significant importer of moly.

This report thanks Scott for his insight into an importnat fundamental behind today's moly price.

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

Here is my weekly input to Kitco Gold Survey:
02/22/2013 (10:51AM CT)

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

A. Unchanged, $1,575 per ounce target.

Q. Why?

A. Although the return of Chinese traders from their Lunar New Year break lent some support to gold price early in the week, commodity liquidations followed doing serious damage to gold, oil and copper prices. Concern that Federal Reserve quantitative easing may end sooner than expected and still shaky global recovery began the slide in prices. The primary benefactor has been the U.S. dollar index which is at 3-month highs; Comex gold slipped to an 8-1/2 month low at $1,554.1 per ounce on Thursday.

My target of $1,575 per ounce is a negative bias below the mean of this week’s high ($1,618.8) and the May 1, 2012 low of $1,538.7, representing a “sideways” expectation given this morning’s prices.

The yellow metal has lost value relative to key commodities as well as the broader markets but has regained some ground from value lows last Friday for oil and copper, and its value low Tuesday compared to the S&P 500.

Technically, negative 1-month rolling correlations between gold and global commodities oil and copper have turned positive this week although the 3-month correlations remain negative. This may indicate that the worst may soon be over for oil and the red metal. Although gold has lost considerable value to both key commodities, the 6-1/2 uptrend in gold value is still on solid footing (note 6, also Ref 3).

For $1,575 per ounce gold we can expect to see silver in a range of $28.2-$30.0 per ounce; and copper in a range of $3.38-$3.57 per pound. Silver is expected to have a negative bias below its range mean ($29.116); copper, a positive bias above its mean ($3.4759). The Dec. 20, 2012 low was $3.5323 offering a level of support.

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 92.98, below the key-100 level but just above the 1-month moving average of 92.47. The 2012 high was 103.73 on Nov. 13.

The ratio of gold-to-the S&P 500 (AUSP) is now 17.8% below its 2012 high (1.2710, Nov.15) at 1.04450. The latest price action indicates gold has lost considerable value relative to the broader market but off its Feb. 20 low of 1.03844.

Background Notes:
  1. My gold target price of $1,575 per ounce is a negative bias below the geometric mean of $1,578.2 per ounce given the stated range highs and lows
  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©). The same technique was used to predict the price range for copper.
  3. My Gold Value Index© (GVI) equals 92.98 or 10.4% below the 2012 high of 103.73. Today gold value is above its 1-month moving average of 92.47; 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 444.47 pounds per ounce and below its 3-month moving average of 458.34 and 6-1/2 year trend of 487.33. 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 very low 1.42%. The 1-month rolling correlation is +0.73; 3-month is -0.17. 3-month relative volatility is 0.91X gold and price sensitivity (beta) is -0.16
  5. The gold-to-silver ratio (GSR) is above its historical norm at 55.210; the 3-month rolling correlation is +0.99, relative volatility is 2.08X gold and price sensitivity (beta) is +2.08. The GSR is above its 3-month average of 53.19; the 1-month gold-to-silver ratio stability is a low 1.59%.
  6. On a positive note, it is interesting that although gold has lost considerable value relative to oil and copper since early November, the uptrend in gold value relative to these global commodities remains on solid footing (mid-2006 to the present). If this relation gives way, gold is probably in a world of hurt. Also, 1-month gold ratios relative to WTI & Cu remain quite stable* unlike the early-October 2011 commodity debacle following the U.S. debt downgrade:
    1. Au:WTI -0.74 sigma below 6-1/2 year trend line; Au:Cu -0.68 sigma below trend (charts attached) - I consider > 2-sigma indicative of a potential breakdown
    2. Au:WTI 1-month stability* 1.7% (3.2% 10/6/11); Au:Cu 1.6% (5.7% 10/3/11) - I consider ratio stability > 3% to be divergent & worrisome
(* stability defined as the standard deviation of the gold ratio normalized by its mean over 1-month)

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)


Colonel Possum

Headline photograph by Mariana Titus

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