"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, February 24, 2017

Gold Breaks $1,260; Copper Reversal - Uh-Oh, Later You Say?


A Point-of-Balance
Devil's Gate, Eureka, Nevada (2012)

Weekly Summary updated for 2/24/17 AM (something new!)


(click on table for larger size)

McEwen Ming (MUX) $3.95 per share 

General Moly (GMO) $0.5301 per share; Moly oxide (LME) $6.92 per pound 

Friday, February 24, 2017 AM 

Morning Miners!

Gold continues on its path upwards but we have some red metal warnings...watch silver.

My input to the Weekly Kitco Gold Survey:

My vote is up. Target gold price $1,265 per ounce . Target Silver price $18.4 per ounce.

Another strong week for gold as a copper reversal to the downside and plummet in 10-year yields* suggest the President's signature tax reform plan and infrastructure plans may be realized later than originally expected. Comments by the new Treasury Secretary implied that the former may not be rolled out until this summer; infrastructure spending will now likely begin in 2018 [Update: Comex copper $2.68 per ounce, 10-year yield 2.3170%, Friday close]

Comex gold broke the key-$1,250 level yesterday, now trading at 1,257.9 per ounce. The yellow metal is on a march to $1,280 and is likely to break $1,265 next week. Silver is also showing strength with a fall in the gold-to-silver ratio supporting an $18.4 per ounce level in the near term.[Update: Comex gold $1,258.3 per ounce, silver $18.339 per ounce, Friday close]

Soaring stock markets and a a strong U.S. dollar bounce stalled on this re-calibration of expectations but could reemerge as headwinds for the yellow metal. However, its 3.5-month high this morning ($1,261.2) was allied by solid value gains for the week compared to copper, oil and the broader Bloomberg Commodity Index (BCOM) [see Weekly Summary above].

Gold also rose in terms of major currencies euro and Japanese yen - all very bullish indications [see chart below]

Factors creating a solid floor for gold above $1,200 per ounce are fears of a "Frexit" if the French FN party prevails in upcoming elections and the Greek bailout review.

Have a good weekend!

*Gundlach expects U.S. 10-year T-note yield to drop below 2.25 percent (Reuters, 2/25/2017)


Copper Reversal


Supernova, Mariana Titus (2011)

Janet Mirasola, Managing director for Sucden Futures Inc. NY, described recent drivers for copper price this morning:

Other global assets however have reacted to short term corrections as metals and mining shares were affected by yesterday's sudden fall for the Red One even though a strike at Escondida, the world's biggest copper mine is entering its third week. The Red One yesterday fell over 3% triggered by a story from Axios' Mike Allen saying that the promise of infrastructure spending that had been made immediately following the election last November may be delayed until 2018 taking the froth off a copper rally that began with that thought and carried through with the added burden of supply disruption at Escondida in Chile and Grasberg in Indonesia.(Morning pre-market brief, 2/24/17)

Yesterday Comes copper reversed to the downside (i.e. lower high, lower low, lower closing price) breaking the 2017 uptrend. This morning the red metal is below $6,000/tonne, trading presently at $2.654 per pound ($5851/tonne).

However, copper has enjoyed a greater than 30% rise in price over the last 12 months. The Bloomberg Commodity Index (BCOM), including everything from animals that oink to metals that shine, is up over 20%. For metals the reasons include increased global infrastructure spending, Chinese attempts to cut excess capacity and the closure of some large mines. A significant portion of the rally has come after the election of Donald Trump with his promise of massive infrastructure spending in the U.S. If there are delays in implementation, copper prices will feel the impact in 2017.

The fate of the Chinese yuan remains a key tell for gold and copper - a material drop in valuation could boost gold and depress copper prices. Aggressive liquidity tightening by the People's Bank of China (PBOC) has eased, stabilizing the yuan below 7 USD/CNY. However, defending their currency has brought China foreign reserves to a 6-year low. Now that the Lunar New Year holiday is over, we'll see if this vigorous defense is sustainable. This morning, the yuan is steady at 6.8644 USD/CNY. So far so good.

Gold Price Outlook 2017

Gold started the year nicely and should remain in my newly revised range of $1,180 to $1,320 per ounce*. Average gold price for 2017 should print above $1,200 per ounce. This morning's peak at $1,261.2 is a 3.5 month high.

An important gold ratio to watch is gold-to-S&P500 or AUSP. The ratio bottomed in early-December of 2015 and reversed to a bullish trend, peaking February 11, 2016. It bottomed again December 20, 2016 but has been trending higher since. Confirming a double-bottom in the coming months would be a significant positive for the lustrous metal.

Gold has gained ground on the embattled euro and yen. Post-election, gold in euro and yen terms are converging and safely above 2013 lows [chart below] and are both above pre-election levels. Additionally, gold ratios relative to copper and oil are stabilizing near historically less extreme levels which is a healthy sign [Chart to Watch, below]. Geo-political events and/or a bump in inflation expectations could restore glitter to gold in 2017.

Gold near my low-range of $1,180 per ounce-level is a tempting "buy."

(please do your own research, markets can turn on you faster than a feral cat!)

*My pre-election October range for gold price was $1,240 to $1,320 per ounce, Winter 2016 Edition of the Mining Quarterly Storms Never Last: Positive News for Gold, Oil & Copper

Click on the image for a larger size:


Gold in euro & yen terms regaining value post-election

Winter 2016 Edition Mining Quarterly



Elko Daily Free Press Editor Marianne Kobak McKown has put together another dandy. The Winter Edition of the Mining Quarterly has great columns on Newmont Mining Corp.'s Twin Creeks Mine, Cripple Creek and Victor Mine (Colorado), Barrick Gold Corp.'s Cortez Hills, EP Minerals' unique product and the Kinross expansion of Bald Mountain.

Chart to Watch

Here's an importanat chart to watch. Click on the image for a larger size:


Gold’s record rise against key commodities
in the strong dollar era (updated 2/24/2017) 

Excerpt from the just released Winter 2016 Edition of the Mining Quarterly Storms Never Last: Positive News for Gold, Oil & Copper:

This chart [updated through this morning, February 24] is a record of oil and copper gold ratios for the last six years. October, 2010 was a relatively peaceful period when ratios were stable and close to historical norms following the market turbulence of the 2008-2009 financial crisis.

The chart indicates the percentage value change from that moment of calm. The China slowdown began to impact commodity prices in 2011. However, prices were protected to a degree by U.S. monetary policy that suppressed the value of the U.S. dollar. 

For example, even during periods a high volatility, copper prices rarely dipped below $3 per pound. This is a level above even the most optimistic forecasts these days. Two Federal Reserve quantitative easing programs (or QE, the printing of dollars to buy bonds) helped moderate gold ratios through October 2014 amid record gold peaks, crashing copper prices and $100-plus oil. This period is shown by the gray box in the chart. The Oct. 3, 2011 +50% extreme occurred as the gold-to-copper ratio peaked following the already noted U.S. debt crisis. The bottom of the box marks a -30% low for the gold-to-oil ratio. Wild days for sure but the Federal Reserve kept commodity storms inside the hotel. 

Trouble spilled onto the streets when the U.S. stopped printing money concurrent with a global crash in oil prices in late-2014. At the same time, other central banks tried to goose their stagnant economies with increasingly looser and experimental policies as the U.S contemplated raising interest rates. This divergence in monetary policy ushered in the current strong dollar era – a real headwind for dollarized commodities.

The value of gold relative to oil and copper headed north in a hurry. This year, the gold-to-oil ratio reached a record and unsustainable high Feb. 11 (up 180%); and for copper, Sep. 7 (up 80%). To give this some historical perspective, the average gold-to-oil ratio for the QE2 through QE3 period is 15.7 barrels per ounce. From 1986 through QE3, the average is 16.0. The February peak touched a jaw-dropping 47 barrels. Copper soared from 350 pounds per ounce six years ago to top out above 640.

Gold price in U.S. dollars rallied strongly as copper and oil fell at the beginning of 2016 scoring a nearly 30% gain by early-July. The yellow metal had left the commodity hotel and dominated major currencies as I explained in the Fall Edition of the Mining Quarterly. Very unusual times indeed. 

There are increasing signs that major central banks will methodically pull back from aggressive policies and those nations will look to fiscal stimulation to keep their economies energized. Oil and copper prices are on the rise given an extra boost by rising inflation expectations. Gold ratios in turn are falling from their lofty peaks...It is important to note that the higher-low trendlines (dashed lines) have now been broken with declining gold ratios. So far go good - confident resource CEOs pass the gold test. Supply will slowly come into balance with demand and the yellow metal is checking back in the commodity hotel [i.e. plot traces remain below green horizontal dashed line]

Cheers,

Colonel Possum & Mariana

Photos by Mariana Titus if not otherwise noted

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