China to the Rescue? Gold Breaks $1200, Moly (EU) Up

Morning Miners!

It is 6:07 AM. Let me pour you a cup of hump day java freshly brewed. Returning to yesterday's metallic puzzle we find it has only become more interesting in the wee hours. The Report has worried whether the recent rally in the base metals has legs given the lackluster performance of gold. This morning gold broke $1200/oz in the London spot market and COMEX is presently trading at $1203.2/oz (December contract, most active). Maybe I hear the hoofs of the cavalry approaching.

Last Friday the ole Colonel stated:

"Copper and gold have been in a wicked inversion for some time and I'm going to have my doubts about the sustainability of this copper rally if gold doesn't return to $1200/oz country soon." (GDP "Less Better", 7/30/2010)

Today COMEX copper is up ($3.3765/lb, September) and aluminum just hit a 3-month high ($2,230/metric ton) on the London Metal Exchange (LME). Pardner, we need more days like this with gold and the metals moving in the same direction (Will Gold & Copper Ever Make Up?). The funny thing is that the cavalry may be arriving on Chinese horses. Here is an interesting piece on the liberalization of China's gold policy together with a change in investor sentiment. Both may explain today's bounce:

Gold Caps Longest Rally in Since April as China Demand May Gain (Millie Munshi and Nicholas Larkin, Bloomberg, 8/3/2010)

I thought I'd show you a few charts this morning to illustrate the recent copper/gold inversion. Most of the time the metals and gold are "positively" correlated or in other words, their price movements tend to be in the same direction. Correlation is a calculation derived from the price histories of two commodities and has a value from -1 to +1. A correlation of "zero" implies no directional relation and the two prices are said to be uncorrelated. Silver and gold almost always have a high "positive" correlation. Presently the 3-month correlation of gold and silver is 0.7485 with a high of 0.9783 last Fall (10/5/09).

A "negative" correlation occurs when two prices move in opposition which has been the case for copper and gold for the last several months. Today the 3-month correlation (or "rho") of copper and gold is -0.4689; a peak inversion of -0.8571 happened in June (6/24/10). One way to visualize this relation over time is to plot the "near-term" 3-month versus the "short-term" 1-month correlations as shown below:



In this case we start out on 4/27/10 when both copper and gold were positively correlated (i.e. in the "+,+" quadrant). Incidentally, this is the day after this year's S&P 500 high and shortly after COMEX copper hit its high of $3.5840/lb (4/12/10). Unfortunately we soon descended into negative territory as the financial crisis in Europe worsened (blue line). Presently we remain in the "-/-" quadrant for both the short and near-term correlations - the magenta line and arrow show the most recent data and direction. Although today's gold bounce helps move the short-term relation, we still have a long way to go to return to the "+,+" pasture.

It may be helpful to see what a complete journey to copper/gold inversion and back looks like. Here is a record from April to July of 2009, the last time a major copper/gold inversion occurred. We start out in the "+,+" quadrant (4/3/09) and follow a roughly counter-clockwise trajectory down to "-,-" land and back up to the "+,+" corral. There is a slight jog at the end to "-,+" before reaching the end point on 7/09/09:


Interestingly, this return to positive territory ran alongside a rally in copper prices that did not significantly stall until April of this year.

That's a lot of wiggly lines and voodoo to explain my point but hopefully you can see why the ole Colonel has been a bit concerned about this metal rally. A few more days like this could drive the metallic herd back to the "+/+" golden corral. If gold falters, all bets are off. Stay tuned buckaroos.

Leaving on a positive note, European moly oxide and the LME molybdenum futures have both been trending higher lately leaving even more light between them and a lagging western number. Look for a pickup in Western moly prices if the metals rally continues (see below).

Enough talk, let's walk the walk:

The Eureka Miner's Index(EMI) remains above par at 139.86, slightly down from yesterday's 141.72 and a big improvement from the 6/7/10 low of 50.7. Remember an EMI greater than 100 is good times for metals & miners (NOTE: at market close Friday, 7/23, the EMI was 112.61)

4-WD is ON - rough but improving roads in the marketplace; The VIX or "fear index" is below 25; metals & miners remain on shaky but much firmer timber with benchmark FCX trading close to its 200-day average of $75.4 (our new warning level, 7/27 update), 10-year Treasurys are safely below 4% preserving a low-interest rate environment

The GREEN light is turned back on for Commodity Reflation with copper trading above $3/lb

The GREEN light is turned on for Stable Markets the VIX below the 30 level (what's this?)

The GREEN light is turned back on for Investor Confidence as investors return to equities.

The YELLOW light is turned on our Fuel Gauge with oil above $80

A ORANGE light is ON for possible adverse regulation/legislation: Mine Safety Violations, Miner's claim fee, Miner taxation, Cortez Hills, mercury emissions , General Moly Mt. Hope Water Rights, U.S. House committee debates miner workplace safety bill

Otherwise, all lights are green on the Eureka Outlook Dashboard (upper right, what's this?)

NYMEX/COMEX: Oil is down $0.09 in early trading to $82.46 (September contract, most active); Gold is up $15.7 to $1203.2 (December contract, most active); Silver is up $0.228 to $18.650 (September contract, most active); Copper is up $0.0180 to $3.3765 (September contract, most active)

Western Molybdenum Oxide is $14.25; European Molybdenum Oxide is $15.05; LME moly 3-month seller's contract is $15.42, LME cash seller is $15.22

The DOW is up 15.14 points to 10,651.52; the S&P 500 is down 8.59 to 1120.7. The miners are happy:

Barrick (ABX) $42.36 up 2.39%
Newmont (NEM) $56.20 up 1.32%
US Gold (UXG) $5.11 up 1.39%
General Moly (Eureka Moly, LLC) (GMO) $3.28 up 1,24%
Thompson Creek (TC) $9.41 up 0.97%
Freeport-McMoRan (FCX) $74.42 up 0.53% (a bellwether mining stock spanning copper, gold & molybdenum)

The Steels are up, (a "tell" for General Moly & Thompson Creek):

ArcelorMittal (MT) $33.43 up 2.08% - global steel producer
POSCO (PKX) $108.48 up 0.81% - South Korean integrated steel producer

The Eureka Miner's Grubstake Portfolio is is up 1.31% to $1,415,172.19 (what's this?).

Cheers,

Colonel Possum

Write Colonel Possum at colonelpossum@gmail.com for answers to your questions or to request e-mail updates on the market

Headline photograph by Mariana Titus