Gold Breaks $1,280; Copper Crash Bottom? Miners Embattled, Not Broken

Winter Sky, Eureka, Nevada

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*** Local Mining News ***

Midway Provides Construction Update For Pan Gold Project, Nevada (Press release, 01/16/2015)

Timberline Resources Drilling Identifies New Zone of Gold Mineralization at Eureka (Press release, 01/14/2015)

General Moly Announces Closing of Private Placement Financing (Press release, 12/30/2014)

Timberline Resources Commences Drilling at Eureka (Press release, 12/17/2014)

*** AM Prices ***

The early morning prices used for today's analysis (most active contracts):

Goldman Sachs Commodity Index

S&P GSCI 387.5 (378.5 52-wk low)

Nymex/Comex

Nymex oil (WTI) $47.49 per barrel
Comex copper $2.5760 per pound
Comex gold $1,273.1 per ounce
Comex silver $17.360 per ounce

Latest Nevada gasoline prices

Note: There are several changes to the Eureka Miner for the new year. For the time being, Kitco News, Montreal has suspended their weekly gold survey due to staffing changes. However, I will provide a periodic gold price outlook based on my column in the Winter 2014 Edition of the Mining Quarterly with updates to the analysis and charts given in that piece (see below). This replaces the weekly survey input to Kitco News. The ole Colonel will continue to contribute periodic articles to that publication and this report.

Wipe Out Wednesday

Morning Miners!

What a crazy week this has been - crashing copper prices, gold rally to a new 4-month high and blood on the street for the Mining Sector. Although red metal prices started their fall Monday, the worst day was Wednesday with Comex copper plumbing $2.4240 per pound. The Eureka Miner issued an e-mail alert which included Wells Fargo Securities Janet Mirasola warning in her pre-market brief:

"Copper – our Red One! was crushed overnight as traders in China stampeded the exits leaving a 9% scar on the price as it traded to a low of $5353 mt [$2.4281 per pound] before recovering back to current levels around $5500 and a more manageable overnight loss of only 6.5%. This move highlights the contagion that began in the Oil market where values have lost about 60% since last June. “What could possibly go wrong?” is obvious here and the fact that CHINA IS REALLY SLOWING tells us that this commodity rout may not be an isolated move and could start to affect global asset classes across the board."

Ouch! Fortunately, Comex copper bounced off these lows and is trading this morning at $2.5760 per pound. Are the lows in? Hard to say, but Mirasola sees surplus and declining demand. Her brief continued Thursday:

"Now that the dust is settling a bit, investors will likely take time to reassess portfolio strategies. What is clear is that there still remains a real mispricing between copper and oil. While copper had been under steady pressure, oil was falling at a faster pace over the last six months. Copper hadn’t really reacted to the oil move as many were hoping for some kind of Chinese stimulus that would save the day. The reality is that most analysts expect the market to be in surplus until 2017. With oil’s sell off, production costs are actually lower (sub $5k per tonne[$2.27 per pound]), so a correction of some magnitude is not surprising. We just didn’t expect it would come in one day. We expected to see the steady erosion we’d seen over the last few months. The move overnight appears to be some kind of capitulation of a major long which then had a snowball effect. On a relative basis, you could still see further downside in copper if oil prices stay low (the ratio of copper prices to oil prices is still running way above historical averages)."

Oil, oil, oil - that is the question! Although lower crude oil prices mean lower gas prices and input costs for domestic manufacturing, there are some real downsides too if we stay in the $40 per barrel range for long. The fracking boom has contributed much to U.S. recovery and the rise in employment - prices at this level could put the brakes on that industry with adverse ripple effects for the economy.

On the global scale, oil-dependent countries like Russia and Venezuela could potentially liquidate a portion of their substantial gold reserves given that their economies already on the brink. This would introduce supply pressure on gold prices. But for now....

Gold is a Shining Star!

Gold has re-established a considerable "safe-haven" premium. Pick your favorite combination of worldly woes du jour: slowdown in China, oil and copper precipitous declines, Russia turmoil and ruble collapse, renewed debate over Greece’s membership in the EU and horrifying attacks in France. Clearly the biggest driver to the late-week rally was the Swiss National Bank (SNB) surprising decision to unpeg the franc from the euro causing volatility in both the currency and precious metal markets.

There is some delight in seeing gold rally briefly above $1,280 per ounce on the same day the U.S. Dollar Index soars to new highs. This report tracks the Powershares DB U.S. Dollar Index Fund (UUP) which is up a full 17% from its May low of last year. In contrats the euro is dropping to new lows (presently 1.1517) as deflation fears in the euro-zone accelerate.

My gold 2015 price forecasts are derived from the Colonel's column on the yellow metal in the latest edition of the...

Winter 2014 Mining Quarterly

The online edition of the Winter 2014 Mining Quarterly is out and about. Elko Daily Free Press Editor Marianne Kobak McKown and her team have done an outstanding job on this publication. There are feature articles on Cortez Hills, Barrick's Turquoise Ridge and Newmont's Twin Creeks together with updates on Comstock, Pershing Gold, Veris Gold and Western Lithium. It's a dandy!

The ole Colonel wrote a gold price outlook for 2015, Gold at the Crossroads, which you can find on pages 72-77 of the online edition and 75-79 of the printed version. This report closes with updates for the charts and numbers provided in this column - the underlying assumptions for 2015 remain unchanged.

Local & Benchmark Mining Stocks

The Mining Sector is recovering from a horrible week of broad-based declines. Big gold miners Newmont (NEM) and Barrick Gold (ABX) are trading at $22.07 up 2.60% and $11.77 up 3.56% (chart below, click for larger view) . Midway (MDW) is $0.7531 up 1.50% in morning trade. Benchmark Moly Miner Thompson Creek (TC) is up 7.21% at $1.29. GMO is just below 50 cents per share at $0.49. Timberline Resources (TLR) is down 3.45% at $0.70 per share. Please checkout new press releases from Midway and Timberline at the top of this report.

Finally, benchmark miner and copper giant Freeport-McMoRan (FCX) is up 3.06% at $18.89 after a horrendous week that witnessed a $17 handle. Freeport has recently taken on oil interests to diversify so feels double-pain when red metal and oil prices are down. Comex copper is trading presently at $2.5760 per pound.

Blood on the streets? How about when a benchmark miner like Freeport falls to $17.85 on Wipe Out Wednesday - 54.6% below it July intraday high for 2014 ($39.32 per share).

Mining Stocks, Yahoo Finance

Gold Forecast Update

Some highlights updated through this morning's trading:

1. Gold has fared quite well compared to other key commodities; one ounce still buys more ounces of silver, pounds of copper and barrels of oil than it did in late-December 2013. Outpacing a 5.9% gain in U.S. dollar price, glitter is up 18% over the white metal, 40% over the red and a whopping 119% over oil (chart #1, below). A 8-1/2 year uptrend in gold value relative to these commodities is intact. 
2. Gold's relation to commodities works like the force of gravity. Without the propulsion of safe haven or monetary hedge, the yellow metal falls back in line with commodity prices and historical norms. 
3. This relation has formed a declining value wedge since 2011 (chart #2, dashed red lines) which has proved quite accurate in predicting future price ranges. Extending the dashed lines suggests a commodity value range of $790 to $1,170 per ounce for this quarter (1Q2015). The lower number represents a U.S. dollar floor for gold relative to key commodities. 
4. Gold presently carries a premium to the aggregate of key commodities in chart #2; this has been mostly true since August 2011. Using the gravity analogy, gold needs to achieve escape velocity (>$1,300) from the value wedge by increasing premium even more. If that premium disappears gold will follow commodities lower this year. 

Chart #1 (updated from the Winter 2014 Edition of the Mining Quarterly, click for larger view):

Chart #2: 

Cheers - Colonel

Photos by Mariana Titus