Gold & Copper Hang Tough; Barrick & Newmont on a Roll

Bonnie & Clyde

Eureka Miner, September 2010

Please checkout my latest Kitco News commentary 2/29/2016):

Gold & Oil: A Historical Ratio Turns Bad

Update Friday, 2/26/2016

Gold price continues to be resilient even as risk appetite improves globally. Oil price is showing some signs of price stabilization and copper is on a tear given comments from China's Finance Minister Zhou Xiaochuan ahead of the G20 meetings in Shanghai. The PBOC is trying to damp fears of a dramatic yuan devaluation and to express flexibility in future monetary policy - both bullish indicators for markets. U.S GDP was also revised upwards for the fourth quarter from +0.9% to 1.0%; core inflation, from +0.9% to +1.0%. The latest data relieves some concerns about recession.

Current Comex/Nymex prices this morning:

Gold $1,229.8/oz

WTI crudes $34.09/bbl

Copper $2.1395/lb

Barrick Gold (ABX) $13.39

Newmont (NEM) $25.69

Freeport-McMoRan (FCX) $7.675

My input to the weekly Kitco Gold Survey:

Gold's relation with commodities remains dramatically broken:

1. Valuations relative to global benchmarks oil and copper are near historic highs (i.e an ounce of gold buys a whole lot of either) 
2. The correlation with the red metal is zero on both a 1-month & 3-month basis - a highly unusual combination! 
3. Looking forward, the the 5-day correlations with gold & copper are negative - the yellow metal is traveling on a different highway; going to a different destination.

A better model for future gold price arises from its relation to currencies. Gold in euro terms continues to rise higher on Brexit concerns [i.e the U.K. June referendum to stay in or exit from the European Union] topping EUR 1,120 this week (up nearly 30% from its 2013 low). Gold and Japanese yen continue to compete as safe haven trades with the yellow metal moving sideways in yen terms blunting recent gains to the upside. Nonetheless, gold is a healthy 14% above its 2013 low in that currency.

Yellow metal progress against major devalued currencies continues to be a bullish indication. All-in-all the Lone Wolf is bullish and reiterates last week's target price. 

My vote is up. Next week’s target $1,260 per ounce.

Mining Quarterly

The Spring 2016 Spring Edition of the Mining Quarterly will be out March 2.

I have recently submitted an update on the gold and copper price ranges discussed in the last issue below - gold is starting to show some glitter, pardner!!

The online version:

Winter 2015 Mining Quarterly

"Click to read" and the online version looks much like the printed magazine. My column on copper and gold prices for 2016 starts on page 85 (page 82 printed version). Press "Esc" to return to the Elko Daily Free Press. There is a handy scroll bar for page selection at the bottom of the screen. The same article appeared in the Elko Daily Free Press December 3:

What do copper & gold signal for 2016? 

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Numbers used for analysis (AM prices):

Goldman Sachs Commodity Index

S&P GSCI 294.7, 03/16 contract (intraday low 279.25 1/20/2015)

Nymex/Comex (most active contracts)

Nymex oil (WTI) $32.08 per barrel 

Brent crude $ 33.58 per barrel 

Comex copper $2.0755 per pound

Comex gold $1,228.4 per ounce 

Comex silver $15.395 per ounce

Canary in the gold mine: Fate of high yield corporate bonds

iShares iBoxx $ High Yield Corporate Bond (HYG) $77.19 ($75.09 52-week low)

Trouble ahead: HYG < $82...oh-oh

Latest Nevada gasoline prices

Alpine Bar Mirror

Eureka Miner, September 2010

Gold & Copper Hang Tough

Macro drivers: Continued concerns about China, commodity-exporting economies; U.S. Federal Reserve interest rate trajectory 

Wild cards: "Lower for longer" commodity prices, Fate of high yield bonds

Gold bet for next week: $1,260

Morning Miners!

For old times sake, The Eureka Miner will feature photos and excerpts from the past in this report and ones to follow. Here's an oldie interview with Barrick Gold ex-CEO Aaron Regent from September 23, 2010:

Arguing the reasonableness of $1300/oz gold, Mr. Regent stated that in "real terms" the present price is only 55% of the 1980 peak of $2300/oz (i.e. the inflation adjusted price). He also cited the stability of oil and copper prices in terms of gold (i.e barrels of oil and pounds of copper per ounce of gold). Followers of this Report understand the importance of the oil/gold and copper/gold relation since both oil and copper are proxies for global growth. Comparing their value with gold removes currency variability. Mr. Regent said that historical averages of 15 barrels of oil and 433 pounds of copper per ounce of gold are in line with today's prices... 

Was Aaron Regent right about gold and oil? Checkout the "Chart to Watch" below.

It would be great if gold price would return to $1,300 per ounce this year, so far it's showing a lot of strength. Thursday Comex gold touched $1,240 presently trading at $1,228.4. I believe the 2-month uptrend is still intact. It is important to compare gold performance with currencies instead of commodities in this environment. My morning input to the Weekly Kitco Gold Survey:

On the currency front, gold continues to bullishly rise in euro terms peaking at EUR 1,110 yesterday. Gold in yen terms has softened with a strengthening Japanese currency but is still more than 13% above its 2013 low. By comparison gold in euro is more than 25% above this key benchmark. Yellow metal progress against major devalued currencies is a bullish indication. 

All-in-all the Lone Wolf remains bullish and reiterates last week's target.

My vote is up. Next week’s target $1,260 per ounce

The red metal is faring pretty well too. I thought copper may return to the sub-$2 basement after the Chinese traders returned from New Year holiday. Instead, copper got a bid rising from its February 11 low of $1.998 per pound to a high today of $2.0940, a nearly 5% rise.

Freeport Up-up

Copper mammoth and benchmark miner Freeport McMoRan (FCX) is also showing signs of life trading at $7.05 per share up from its January low of $3.52 - a 100% improvement!

Barrick & Newmont on a Roll

It is exceptionally encouraging to witness Nevada's two big mining giants recovering from the depths of 2015. From September's low of $5.91 per share, Barrick Gold (ABX) is up 119% to trade at $12.94 this morning. Newmont (NEM) is up a respectable 65%; from a September $15.43 to $25.60 per share.

A sobering comparison is Barrick at $46.78 and Newmont at $64.30 per share in today's oldie September, 2010 report. Those were the days - let's hope the worst id behind us, pardner.

Chart to Watch

The ignominious demise of a gold & oil platitude [updated with corrections 2/24/2016]

In 2010, Barrick Gold ex-CEO Aaron Regent cited a historical gold-to-oil ratio of 15 bbl/oz when asked if $1,300/oz was an excessive price for gold. His reply was that gold price was in inline with the "historical average" for the ratio. [Regent Video CNBC News, 9/23/2010]

Comex Gold-to-Nymex WTI Ratio

(click on chart for larger image)

The above chart shows that Mr. Regent's comment was not unreasonable from the start QE-2 to the end of QE-3 (11/3/2010 to 10/29/2014). During that period, the mean ratio was 15.7 bbl/oz with a standard deviation of 2.5 bbl/oz. Through the high oil prices of Arab Spring & peak gold following the U.S. credit crisis, most of the data fall obediently within 2-standard deviations of the mean. After October 2014 the model diverged to a climax of 47.1 bbl/oz this February - a jaw-dropping 12.5-standard deviations.

This model has followed Mr. Regent down the mine shaft.

Lesson Learned: A technological disruption (fracking shale) has dramatically changed oil's valuation relative to gold - somewhat like comparing the value shift from wooden wheels to rubber tires. It is anyone's guess what the new steady-state ratio will be.

The gold-to-copper ratio scored a high on par with its 2009 peak (~620 lbs per ounce) on the same day as the oil ratio peaked (2/11/2016). However, the technology of mining gold and base metals hasn't changed and varies mostly in the recovery/reduction process of the extracted ore (digging ore out the ground is essentially the same). In other words, the gold/copper model is pretty good, pretty stable with R-squared ~0.6 (more statistical gibberish that indicates reasonable model quality).

Over the same QE-2 to QE-3 period, the gold-to-copper ratio was 420 lbs per ounce. Again, reasonably close to Aaron Regent's average. The current 3-month average ratio is 530 pounds per ounce. Gold value relative to copper has been slowly trending higher since mid-2006.

Market Stats

Here's the scorecard on the stock market, S&P 500 is at 1,905.61 (Friday AM):

Market corrections are generally defined as a 10% or greater move to the downside from the top of a key index. I like to use the S&P 500 (.SPX) because it includes a broader swath of America' best companies than the Dow Jones Industrial (.DJIA) - five hundred compared to thirty. Here is the score sheet of ups and downs on an intraday basis since May:

August downdraft:

S&P 500 high: 2,134.72, 5/20/2015

S&P 500 10% correction 1,921.25

S&P 500 low: 1,867.01, on Monday 8/24/2015 down 12.5%

Then from the late December high, the February downdraft:

S&P 500 high: 2,081.56, 12/29/2015
S&P 500 low: 1,810.10, on 2/11/2016 down 13.0% & 15.2% from 5/20/2015 high

S&P 500 bear market begins below 20% at 1,707.78

For Fibonacci folks the December-January "fib box" is:

50.0% retracement from 2/11 low = 1,946

61.8% retracement from 2/11 low = 1,978

Getting inside the "fib box" is generally considered a "bullish" move to the upside; failing the "fib box" is a bearish indication.

We're still below the Dec-Feb fib box - a very bearish indication.

Cheers - Colonel

Photos by Mariana Titus