Bombs Over Iraq - Gold Stalls, Stocks Rise

Mining Memories, Ruby Hill, Nevada

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Midway Announces 2014 Second Quarter Financial Results And Announces CEO Retirement (Press Release, August 6, 2014)

General Moly Announces Second Quarter 2014 Results (Press Release, August 4, 2014) 

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My latest column in Kitco News:

Oil, Copper & Gold Reunite - What Next? (Kitco News, July 7, 2014)

My latest column in the Mining Quarterly:

What is the Commodity Value of Gold? (p. 99-1010 online, p. 94-95, MQ Summer Edition 2014)


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

Mariana's fine art prints are featured in Fine Art America: Mariana Titus

Friday's AM prices used for this morning's early analysis: 

COMEX Gold price = $1,313.9/oz (December contract most active)
COMEX Silver = $20.40/oz (Sept)
COMEX Copper = $3.1680/lb (Sept)



NYMEX WTI crude = $97.67/bbl (Sept)
ICE Brent crude = $106.33/bbl (Sept)


Eureka Miner’s Gold Value Index© (GVI) = 88.43 (gold value relative to a basket of commodities that include oil, copper and silver; 100 is a high gold value)
Value Adjusted Gold Price© (VAGP) = $1,241.4/oz
COMEX - VAGP = +72.46/oz; gold is trading at a rising premium to key commodities

As of 10:18 AM PDT:

Barrick Gold (ABX) = $18.70 up 1.14%
Newmont Mining (NEM) = $26.31 up 0.52%
Midway Gold (MDW) = $0.9058 up 1.21%
General Moly (GMO) = $0.971 down 2.90% 
Timberline Resources (TLR) = $0.129 up 9.14%

S&P 500 = 1,923.67 up 0.74% (100-day average 1,918)

Morning Miners!

Let's cut to the chase, gold had a good week. This morning F-18s dropped 500 pound bombs on an ISIS (or ISIL*) artillery piece near Erbil, Iraq and gold price stalled. What's going on? This is how I summarized this week's adventures of our favorite metal in the Weekly Kitco Gold Survey (full report is given below):

There is no denying that gold had a good week on many fronts. More ingredients tossed into a witch’s cauldron of regional conflicts and deadly disease caused investors to pile into safe-haven assets. Gold rose in U.S. dollar terms, gained value on global commodities oil and copper, and outpaced falling equities.

The yellow metal may be at a turning point if it can challenge July’s high ($1,347.5) and the S&P 500 trends below its 100-day moving average. However, gold’s advance stalled this morning with bombs dropping over Iraq and the S&P 500 is presently up, slightly above the key 100-day. It appears the real safe-haven winners are U.S. treasuries with the 10-year dipping below 2.4% [bond yields move inversely to price], and a Japanese yen which has recovered from its late-July weakness.

For the short term, persistent trouble in Ukraine, Israel and Iraq will likely keep the yellow metal from retreating below $1,300 per ounce but its upward momentum is waning. My target for next week is therefore $1,305 per ounce.

[*to add to the confusion ISIS refers to militants of The Islamic State(IS) also known as the Islamic State of Iraq and the Levant (ISIL or ISIS). The State Depatment has apparently adopted the ISIL nomenclature]

Nuts. Hard to see the glitter of gold in the shadow of U.S. stocks. That's the relation that must change before sustained gold rallies return to the markets. Global Editor Debbie Carlson of Kitco News included my thoughts on the S&P 500 in her recent column:

S&Ps Start August On Weaker Note; Does A Greater Correction Await? (Debbie Carlson, Kitco News, August 6, 2014)

Richard Baker, editor, Eureka Miner’s Market Report, said he’s keeping an eye on the S&Ps’ technical chart, specifically the 100-day moving average, which as of Tuesday’s close was 1,912. “By my count, if we breach the 100-day on a closing basis, it will be the eighth time in two years. All of these have bounced back after a brief excursion below the average,” he said.

He pointed to the first time this year S&Ps dipped under the 100-day moving average, which was the January-February selloff. The other time S&Ps broke under the 100-day moving average was for a few days in April. Both times the index quickly rebounded. “In the next week or so, If we follow the character of the January-February pullback, (a fall of) 6.1% on an intraday basis, we'd drop below the 100-day and end up at 1,870 which is a key support level,” he said, adding that the May 15 close was 1,870. “Another period that has a similar pattern to January-February 2014 is May-June 2013, which was one of the bigger ones at minus 7.5%,” he added.

That's a lot of technical jibberish that is best understood with a picture (click on the chart for a larger view):

The blue line depicts the closing values of the S&P 500 from August 1, 2011 through Tuesday. The red line is the S&P 500 100-day moving average which has moved ever upwards starting with the beginning of the Federal Reserve's third round of quantitative easing or QE3 (printing money to buy bonds). Here's how I described the relation to Debbie:

Baker said, as have many others, that the Federal Reserve’s extraordinary monetary policies have limited equity pullbacks by both keeping interest rates low, which favors stocks over bonds, and that quantitative easing has lifted equity valuations. But the Federal Reserve has reduced its quantitative easing program each time it met this year and is expected to wrap it up in October. Baker said that may mean that 10%-or-greater corrections could be more likely in the future. “Markets anticipate; could the recent S&P 500 pullback reflect the final taper? I believe the test is the depth of the correction. The character of the recent descent is similar to late-January/early-February. If the current pullback is greater than, say, 6% in the next week or so, a larger correction may be underway. If the S&P bounces off the 100-day, markets may move higher still,” he said.

In the inset cartoon, Homer Simpson worries about his investment in the U.S. stock market after QE winds down this October. No one really knows how this will play out but I'm willing to bet the present declining relation of gold to rising U.S. stocks, which hasn't changed since mid-November 2012, will change. It may be time for the Lustrous One to step out from the shadows.

Kitco Gold Survey

Here is my input to the Weekly Kitco Gold Survey:

08/08/2014 (10:40 AM CDT)

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

A. Down. My target price is $1,305 per ounce.

Q. Why?

There is no denying that gold had a good week on many fronts. More ingredients tossed into a witch’s cauldron of regional conflicts and deadly disease caused investors to pile into safe-haven assets. Gold rose in U.S. dollar terms, gained value on global commodities oil and copper, and outpaced falling equities.

The yellow metal may be at a turning point if it can challenge July’s high ($1,347.5) and the S&P 500 trends below its 100-day moving average. However, gold’s advance stalled this morning with bombs dropping over Iraq and the S&P 500 is presently up, slightly above the key 100-day. It appears the real safe-haven winners are U.S. treasuries with the 10-year dipping below 2.4%, and a Japanese yen which has recovered from its late-July weakness.

For the short term, persistent trouble in Ukraine, Israel and Iraq will likely keep the yellow metal from retreating below $1,300 per ounce but its upward momentum is waning. My target for next week is therefore $1,305 per ounce.

For $1,305 gold we can expect to see silver in a statistically bounded range* of $20.0-$21.3 per ounce. Silver is expected to have a negative bias with respect to a range mean of $20.67 per ounce. Future copper price is in a statistical range* of $3.14-$3.31 per ounce. Copper is expected to have a negative bias with respect to a range mean of $3.2230 per pound.

(* +/- 2-standard deviations, 1-month basis: prices that fall outside this range likely signal a market-changing event. Bias from mean infers expected market direction from a 1-month gold ratio average)

The S&P 500 at 1,911.27 is down 0.7% for the week in morning trading. Comex gold is up 1.5% for the week gaining significantly 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). The AUSP then broke decisively below the lower boundary for a second leg of descent (dashed red lines). This channel was bullishly broken to the upside in late-January and rose above the lower boundary of the sideways channel (blue dashed line) However, this advance has now retreated below the lower boundary into a second sideways channel bearishly lower than the first. This morning’s gold price represents a loss of 45.9% of value relative to the November peak (AUSP=1.2710).

For the week, the yellow metal gained value on both oil and copper; oil gained 1.3% on 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 414.7 pounds of copper.” Percentages are deltas over one week.

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 88.43, below the key-100 level but above the 1-month moving average of 86.25. The 2012 high was 103.73 on Nov. 13. The commodity price of gold is $1,214.4 per ounce or $72.46 discount to actual gold price (i.e. gold is trading at a premium to a basket of key commodities).

Cheers,

Colonel Possum

Photos by Mariana Titus

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Mariana's fine art prints are featured in Fine Art America: Mariana Titus

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