"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, January 10, 2014

"Rather Strange" Jobs Report Bounces Gold, Copper


On the road to Reno via HWY 50 Nevada


*** Local Mining News ***

General Moly Announces Filing of Updated NI 43-101 Technical Report for Mt. Hope Project (Press Release, 01/16/2014)

MIDWAY BREAKS GROUND AT PAN GOLD PROJECT, NEVADA (Press Release, 01/15/2014)

MIDWAY GOLD COMPLETES PERMITTING – RECEIVES RECORD OF DECISION PAN PROJECT, NEVADA (Press Release, 12/20/2013)
 
General Moly Announces Updated Operating Cost Estimate and Project Economics for Mt. Hope Project (Press release, 12/05/2013) 

Latest Nevada Gas Prices (click this link)

My latest Kitco commentary:  Gold (Still) Trapped in a Value Wedge (12/09/2013) 

My latest column in the Mining Quarterly: Copper & Gold - The Long Ride from Lehman Brothers (p. 90-91 online, p. 84-85 printed copy, MQ Winter Edition 2013)


Paintings by Mariana Titus, The Three Anas & The Three Moon Anas, are presently at Lafitte Guest House & Gallery, New Orleans

Monday's AM prices used for this morning's analysis: 


COMEX Gold price = $1,240.6/oz (February contract most active)
COMEX Silver = $20.300/oz (March)
COMEX Copper = $3.3375/lb (
March)
NYMEX WTI crude = $92.61/bbl (
February)
ICE Brent crude = $106.20/bbl (March)



Eureka Miner’s Gold Value Index© (GVI) = 83.35 (gold value relative to a basket of commodities that include oil, copper and silver; 100 is a high value)
Value Adjusted Gold Price© (VAGP) = $1,243.6/oz
COMEX - VAGP = -3.01/oz; gold is trading at a decreasing discount to key commodities (moderating bearish trend)




Barrick Gold (ABX) = $18.24 up 2.82%
Newmont Mining (NEM) = $23.718 up 2.23%

Midway Gold (MDW) = 0.8339 up 0.93%
General Moly (GMO) = $1.32 up 1.54%
Timberline Resources (TLR) = $0.1687 down 0.76%
S&P 500 = 1,834.20 down 0.21%




Morning Miners!

Early this morning the U.S. Labor Department issued its first jobs report for the year. Commodities consultant Edward Meir for INTL FCStone characterized the data as "rather strange" which hits the nail on the head. Global markets waited with upbeat anticipation for a strong report of 197,000 additional nonfarm jobs and an unemployment rate of 7.0%. Instead the number was a disappointing 74,000 and an unexpected drop in the unemployment rate to 6.7%. As reported by Kitco News, Mr. Meir states:

“We should note that the two reports are derived from different sampling pools and so move in opposite directions at times.”

and,

“The dollar weakened substantially on the news, now at $1.3650 against the euro. Investors have apparently latched onto the weaker payroll number and are thinking that the softness shown here could slow the Fed’s tapering program. However, it is still early to say for sure and we will have to wait and see how the various markets settle over the course of the day.”

The lower employment rate was largely the result of people leaving the workforce - not too much to celebrate there. On a brighter note, positive revisions to earlier reports have brought the 3-month average up to 172,000 jobs per month which may be high enough to keep the Federal Reserve on their present path of stimuli reduction.

For all the strangeness, Comex gold and copper both bounced trading at $1,240.6 per ounce and $3.3375 per pound as I did my morning analyses. Presently (9:47 AM PT) gold is $1,243.6; and the red metal, $3.3391, both suggesting the markets are still moving favorably for metals as this week comes to a close.

I believe gold's rally may continue into next week (see input to Kitco Gold Survey below) but find stiff resistance at $1,250 per ounce. The following is a repeat of last report's 2014 projections which are essentially unchanged by the events of this week:

Gold Prices for 2014

So what can we expect in 2014? I've written two recent columns on gold's outlook for next year; in the Winter Edition of the Mining Quarterly and more recently, for Kitco News, Montreal:

Copper & Gold - The Long Ride from Lehman Brothers (p. 90-91 online, p. 84-85 printed copy, MQ Winter Edition 2013)

Gold (Still) Trapped in a Value Wedge (Kitco News, 12/09/2013)

By the way, if you haven't checked out the latest Mining Quarterly - do it! Elko Daily Free Press Mining Editor Marianne Kobak McKown has done a terrific job on this issue with the latest news on the mining industry in Northern Nevada.


In the MQ article, I compare the price performance of copper and gold from the fateful collapse of Lehman Brothers Sep. 15, 2008 to the present. My argument is that monetary easing programs of the U.S. Federal Reserve have trumped supply/demand fundamentals for both metals for a significant portion of this 5 year period. There have been three quantitative easing cycles (QE or the printing of money to buy bonds) resulting in metal price reflation (QE1), inflation (QE2) and price stabilization for the current program (QE3).

Current stability in the metal markets is good for a global commodity such as copper which likely maintains a $3 per pound floor for the red metal as long as QE3 provides a supply of easy money. Monetary easing is less supportive for gold which has lost value to copper during all three QE programs. Sustainable gold rallies and even new records have typically occurred near the end or after these monetary interventions (e.g., QE1 and QE2 and respective benchmark gold records that followed). Is this a ray of light in the mine shaft?

The December meeting of the Federal Reserve began the tapering of their massive bond buying program signalling that QE3 will wind down sometime in 2014. Before this cycle is complete, the MQ column submits that "...if continued easing returns [gold/copper valuations] to pre-QE2 levels of 350 pounds per ounce, a $3-to-$4 range for copper would imply a $1,050-to-$1,400 range for gold." This morning the gold/copper valuation is 356 pounds per ounce so we're right on track going into the New Year.

The Kitco article takes a broader view and includes not only copper but oil and silver for a relative value comparison. According to this analysis, gold will enter 2014 trading at a substantial discount to both copper and oil and be trapped in a range of $1,150-to-$1,375 for the first half of the year.

The MQ column concludes:

Absent future price shocks, continuation of the present QE3 program will likely mean less volatile copper and gold prices stabilized within trading ranges. As monetary accommodations fade, metals will naturally revert to the laws of supply and demand. As inflation expectations return, the market should eventually reverse in gold’s favor with a resumption of higher sustainable prices.

With tame inflation in the U.S. and the threat of deflation in Europe, we may have to wait some time to ride the up-elevator of our favorite metal. Always the optimist - let's see what the second-half of 2014 may bring!



Kitco Gold Survey (for Friday morning 01/03/14)

Here is my input for the weekly Kitco Gold Survey:

01/10/2013 (10:27 AM CT)

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

A. Up. My target price is $1,250 per ounce.

Q. Why?

Gold has gained some momentum in January but its rally on today’s weaker-than-expected labor report is not particularly impressive. Nonetheless, gold price will likely take another run at the key $1,250 per ounce level next week on hopes the Fed may moderate the taper on softening employment data. Until gold decisively breaks its declining relation with the U.S. stock market, it is doubtful there will be much upside movement beyond the mid-$1,250 prices.

My gold target for next week is therefore $1,250 per ounce:

For $1,250 per ounce gold we can expect to see silver in a statistically bounded range* of $19.8-$20.7 per ounce; and copper in a range of $3.23-$3.57 per pound. Silver is expected to have a positive bias with respect to a range mean of $20.233 per ounce; copper, a neutral bias with respect to a range mean of $3.3977 per pound.

(* +/- 2-standard deviations, 1-month basis)

This morning, the S&P 500 is slightly up for the week, up 1.3%; gold lost 0.6% on the S&P. The relation between the two is illustrated by a plot of the gold-to-S&P 500 ratio, or AUSP:



The ratio slid into a descending channel mid-November 2012 as money rotated away from gold assets into the U.S. stock market. This trend transitioned to a sideways channel July 5, 2013 (dashed blue lines, AUSP=0.7431). More recently the AUSP has broken decisively below the lower boundary and is on a second leg of descent (dashed red lines) with this morning’s gold trading at a loss of 47.0% of value relative to the November peak (AUSP=1.2710). Breaking above the upper boundary of the second declining channel would be a bullish indication for the yellow metal.

This week, Comex gold is fairly flat for the week in U.S. dollar terms and 13.5% below August’s high ($1,434.0). The yellow metal gained relative to copper and oil for the week; oil lost value relative to the red metal. The chart below is a week-over-week valuation matrix. The first row is the current commodity price in the given currency. For all other rows, read “1 unit of row A buys X units of column B”; for example, “1 ounce of gold buys 371.7 pounds of copper.” Percentages are deltas over one week.



Since November 2012, gold has experienced bearish value destruction not only in U.S. dollar terms but value relative to oil and copper (below comparison is from Nov. 9, 2012).




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 83.35, below the key-100 level and above the 1-month moving average of 82.13. The 2012 high was 103.73 on Nov. 13. The value adjusted price of gold is $1,243.6 per ounce or a $3.01 premium to actual gold price (i.e. gold is trading at a discount to a basket of key commodities).

Happy New Year!

Cheers,

Colonel Possum

Photos by Mariana Titus

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Paintings by Mariana Titus, The Three Anas, are presently at Lafitte Guest House & Gallery, New Orleans
 

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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